2 Manufacturing Tools Stocks to Watch Amid Industry Woes
The Zacks Manufacturing-Tools & Related Products industry is benefiting from improving supply chains, which indicate faster deliveries and easier availability of raw materials. Cost-control measures support the company’s bottom line despite inflationary pressure. While manufacturing activities have been showing signs of improvement, it has remained in the contraction territory for the past several months, indicating a lower demand environment. This weighs on the industry’s near-term prospects.
Despite the dim outlook, Stanley Black & Decker SWK and Lincoln Electric LECO are poised for growth on the back of improving supply chains and an uptick in manufacturing activities.
About the Industry
The Zacks Manufacturing-Tools & Related Products industry comprises companies that develop and distribute hand and mechanics tools, hydraulic tools, engineered fastening systems, and heavy-lifting technology solutions. Arc-welding products, robotic-welding packages, fume-extraction equipment, oxy-fuel cutting equipment, plasma cutters, healthcare solutions, electronic security solutions and other products are also produced by some tool-makers. The highly advanced tools are used in industrial, commercial, oil & gas, mining, automotive and other industries. The providers of electronic security solutions cater to commercial, retailers, government, financial and healthcare markets. Talking about international operations, some industry players provide products and services to customers in North and South America, Japan, Europe, Canada, Asia and the Middle East.
3 Trends Shaping the Future of the Manufacturing Tools Industry
Persistent Weakness in the Manufacturing Sector: Continued weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management (ISM) report, in August, the Manufacturing PMI (Purchasing Manager’s Index) touched 47.6%, contracting for the 10th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index remained in contraction territory at 46.8%, declining 0.5 percentage points from the figure recorded in July. While the manufacturing sector remains in the contraction territory, it is showing signs of gradual improvement. The Manufacturing PMI has been steadily improving over the past few months. In August, the index increased 1.2 percentage points from the figure recorded in July. The uptick in manufacturing activities augurs well for the industry.
Easing Supply Chain Disruptions: While supply-chain disruptions persist, especially related to the availability of electronic components, the situation has improved, as evident from the ISM report’s Supplier Deliveries Index, which reflected faster deliveries for the 11th straight month in August. Easing supply chain issues should support manufacturing tools companies’ growth in 2023. Cost-control measures support the margins of the industry participants despite inflationary pressure.
Hefty Investments in Product Development: The industry participants constantly focus on innovation, product upgrades and development of new products to stay competitive in the market. While this bodes well for long-term growth, the hefty investments associated with it weigh on margins and profitability of these companies. Successive acquisitions to expand product portfolio, boost technological capabilities and extend geographical presence often leave these companies with a highly leveraged balance sheet.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #185. This rank places it in the bottom 26% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group’s 2023 earnings per share has declined 52.1% over the past year.
Despite the industry’s dull near-term prospects, we will present a few stocks that you may want to hold in your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Manufacturing-Tools & Related Products industry has outperformed both the S&P 500 composite index and the sector in the past year.
Over this period, the industry has rallied 21.4%, compared with the sector and the S&P 500 index’s increase of 16.7% and 13.5%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward P/E (F12M), which is a commonly used multiple for valuing manufacturing tools and related product stocks, the industry is currently trading at 19.43X compared with the S&P 500’s 19.44X. It is above the sector’s P/E (F12M) ratio of 16.76X.
Over the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 16.18X, as the chart below shows:
Price-to-Earnings Ratio
Price-to-Earnings Ratio
2 Manufacturing Tool Stocks to Keep a Tab on
The stocks mentioned below carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stanley Black: Headquartered in New Britain, CT, Stanley Black manufactures tools (power and hand tools) and related accessories and engineered fastening systems, among other items. SWK’s global cost-reduction program is expected to drive its bottom line and boost margins. In the first six months of 2023, the company generated pre-tax run rate savings of $460 million from the global cost-reduction program. It expects to generate run rate savings of $1 billion from this program in 2023.
The Zacks Consensus Estimate for Stanley Black’s 2023 earnings has been revised upward by 13.6% in the past 60 days. The stock has rallied 23.3% in the year-to-date period.
Price and Consensus: SWK
Lincoln Electric: Headquartered in Cleveland, OH, Lincoln Electric is a full-line manufacturer and reseller of welding and cutting products. Improving order rates, strong quoting activity and high backlogs for equipment systems and automation solutions are expected to drive LECO’s growth. A strong product development pipeline and investments in new technologies position the company well for future growth.
The Zacks Consensus Estimate for Lincoln Electric’s 2023 earnings has been revised upward by nearly 1% in the past 60 days. The stock has soared 28.8% in the year-to-date period.
Price and Consensus: LECO
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Stanley Black & Decker, Inc. (SWK) : Free Stock Analysis Report
Lincoln Electric Holdings, Inc. (LECO) : Free Stock Analysis Report
