The Zacks Manufacturing – General Industrial industry seems to be gaining from consistent improvement in economic activities, technological progress in manufacturing processes and growth in the e-commerce business. With the reopening of global economies, the industry is anticipated to benefit from improvement in domestic and international orders for industrial products.
Industry players like Illinois Tool Works Inc. (ITW), Parker-Hannifin Corporation (PH), Dover Corporation (DOV) and Graco Inc. (GGG) are poised to capitalize on the opportunities. The optimism surrounding the COVID-19 vaccine and the Fed’s easing policy as part of routing the economy back on track also bodes well for the industry.
About the Industry
The Zacks Manufacturing – General Industrial industry comprises companies that are engaged in the production of a wide range of industrial equipment.
Some industry players offer power transmission products, bearings, engineered fluid power components and systems, industrial rubber products, vapor-abrasive blasting equipment, vehicle-powered truck refrigeration systems, adhesive, gel coat equipment, flow-control components, safety products, and linear motion components. In addition, industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.
The companies provide services to original equipment manufacturing, and maintenance, repair and overhaul customers. These end users belong to industries such as mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation, and utilities.
3 Trends Shaping the Future of Manufacturing General Industrial Industry
Healthy Domestic Orders & Export Demand: The industry has been benefiting from rise in global economic activities as more and more businesses are resuming operations. For instance, U.S. manufacturing activity expanded for the seventh month in a row in November, per the latest Institute for Supply Management’s (“ISM”) report released on Dec 1. Notably, the ISM’s manufacturing index registered 57.5% in November. Also, ISM’s measure of production in the same month was 60.8%, reflecting growth for the sixth consecutive month. In addition, new orders registered 65.1%, indicating sixth consecutive month of increase. Further, new export orders rose to 57.8% from 55.7% in the previous month. This indicates the consistent recovery of economic activities in the sector as more companies are ramping up production with firm orders. In addition, growth in the e-commerce business, particularly amid the coronavirus outbreak, has opened up opportunities for the industrial manufacturing companies.
Technological Advancement Benefits: The U.S. industrial manufacturing companies have been gaining from the technological advancement in manufacturing processes. Notably, several manufacturers have resorted to digitizing their business operations, which has enabled them to gain detailed insight into their operational performances, supply-chain issues and demand patterns. This, in turn, has been aiding them to strengthen operational productivity, product quality and reduce costs, thus, improving competitiveness. In addition, higher government spending, impetus to streamline business regulations, along with Federal Reserve’s easing policy to support the pandemic stricken economy will likely continue aiding the industry participants.
Persistent Headwinds: Despite the positives, concerns related to the new coronavirus strain in the U.K. have marred the near-term prospects of the industry. Some industry players still remain wary of the impact of the coronavirus-related issues on their businesses. Companies, like Nordson Corporation (NDSN) have not provided annual guidance, owing to the uncertain environment arising from the pandemic. In addition, several players are facing challenges like the uncertain demand environment owing to the difficult Sino-U.S. trade relations and highly leveraged balance sheets.
Zacks Industry Rank Indicates Rosy Prospects
The Manufacturing – General Industrial industry is a 41-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #62, which places it in the top 24% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of improved earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2020 have increased 13.6% since the end of May.
Before we discuss a few stocks from the industry, it is worth taking a look at the industry’s shareholder returns and its current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Manufacturing – General Industrial industry has underperformed both the S&P 500 and its sector in the past year. While stocks in the industry have collectively gained 10.7%, the S&P 500 and the Zacks Industrial Products sector have grown 19.2% and 21%, respectively.
One-Year Price Performance
Manufacturing – General Industrial Industry’s Valuation
Price/Earnings (P/E) ratio is commonly used for valuing manufacturing stocks.
The industry’s forward 12-month P/E ratio is 27.72. This clearly shows that the industry is trading above the sector’s forward 12-month P/E ratio of 23.03, and the S&P 500’s 22.85.
Over the past five years, the industry has traded at the highest level of 28.11x forward 12-month P/E and the lowest level of 15.83x. The median level over the same period was 20.35x.
Manufacturing–General Industrial Industry’s Valuation Versus S&P 500
Manufacturing–General Industrial Industry’s Valuation Versus Sector
4 Manufacturing–General Industrial Stocks Moving Ahead of the Pack
Below, we have discussed four stocks from the industry that have strong growth opportunities despite the prevalent pandemic uncertainties. The stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Illinois Tool Works: Headquartered in Glenview, IL, the company is a worldwide manufacturer of highly engineered products and specialty systems. It is poised to benefit from its diversified businesses, solid product offerings and healthy liquidity position in the quarters ahead. Also, broad-based market recovery across all geographies, along with its focus on uninterrupted supply of products in the pandemic era and innovation investments, is likely to drive its near-term performance. In addition, its cost-reduction actions are likely to mitigate some of the financial stress caused by the pandemic.
Shares of the company have gained 14.7% in the past year. It reported better-than-expected results in each of the last four quarters, with the positive earnings surprise being 21.76%, on average. Also, the company’s earnings estimates have improved 6.7% for 2020 and 4.9% for 2021 in the past 60 days.
Price and Consensus: ITW
Parker-Hannifin: Based in Cleveland, OH the company is a global diversified manufacturer of motion & control technologies and systems. The company provides precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. It stands to benefit from strength in its end markets including life science, semiconductor, military, aerospace, rail and power generation. Also, synergistic gains from acquired assets are expected to aid. Moreover, its unique Win Strategy and several cost-control measures are likely to continue proving beneficial.
The company has gained 32.4% in the past year. It reported better-than-expected results in each of the last four quarters, with the positive earnings surprise being 36.91%, on average. In the past 60 days, the company’s earnings estimates have moved up 13.8% for fiscal 2021 (ending June 2021) and 6.8% for fiscal 2022 (ending June 2022).
Price and Consensus: PH
Dover: Headquartered in New York, Dover is an industrial company that produces a wide range of specialized industrial products and manufacturing equipment. The company stands to benefit from strong growth in biopharma, aerospace & defense, heat exchangers and marking & coding business for the current year. Also, its cost reduction initiatives, acquisitions, new product development, as well as inorganic investment in core business platforms will drive growth.
The company has returned 9.8% in the past year. It reported better-than-expected results in each of the trailing four quarters, with the positive earnings surprise being 18.1%, on average. The company’s earnings estimates have improved 0.4% for 2020 and 1.1% for 2021 in the past 60 days.
Price and Consensus: DOV
Graco: The Minneapolis, MN-based company manufactures, designs and sells equipment and systems used to measure, move, control, spray and dispense fluid as well as powder materials. The company seems well placed to benefit from its exposure in new markets, global expansion, buyouts and end-user conversion in the long term. In the near term, an efficient management team, product innovations, solid customer base and a focus on capacity expansion might help. Further, it has a policy of rewarding shareholders handsomely.
Shares of this company have returned 41.2% in the past year. It reported better-than-expected results thrice in the last four quarters, with the positive earnings surprise being 21.74% on average. In the past 60 days, the company’s earnings estimates have remained stable for both 2020 and 2021.
Price and Consensus: GGG
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