The Zacks Manufacturing - Construction and Mining industry, which has been reeling under the U.S.-China trade war and waning demand, has been dealt a further blow in the form of COVID-19 pandemic. The industry was hurt by supply chain disruptions and factory closures owing to government restrictions to curb the spread.
Even though reopening of businesses has led to a pickup in orders lately, it remains to be seen whether this will sustain. Players like Caterpillar Inc. (CAT), Terex Corporation (TEX) and Lonking Holdings Ltd. (LONKF) are banking on cost saving and investment in digital initiatives to buoy margins.
About the Industry
The Zacks Manufacturing - Construction and Mining industry comprises companies that manufacture and sell construction, mining, and utility equipment. The industry participants serve customers utilizing machinery in infrastructure, forestry, heavy and general construction, surface and underground mining operations. The industry participants also provide support to oil and gas, power generation, marine, rail and industrial applications.
What’s Shaping the Future of Manufacturing - Construction and Mining Industry
COVID-19 Impact Casts a Pall: Per the Institute for Supply Management, the Manufacturing Purchasing Managers’ Index (PMI) after posting readings of 50.9% in January and 50.1% in February, slipped below 50 (which indicates contraction) to 49.1% in March primarily due to the pandemic. In April, it further contracted to 41.5% — the lowest reading in 11 years. However, since then it has moved upward with the PMI at 43.1% in May and crossing the threshold of 50 in June by registering 52.6%. It has remained above 50 for four straight months now. The sector seems to be coming out of the woods, aided by gradual resumption of the global economic activities and reopening of businesses. The PMI peaked at 56% in August — the highest so far in 2020, and then dipped a tad to 55.4% in September. Thus, it remains to be seen whether this will sustain considering the surge in coronavirus cases. Uncertainties related to the pandemic will keep weighing on the sector until the situation stabilizes.
Cost-Saving Actions are Key to Staying Afloat: The industry players are taking every action to bolster financial condition, conserve cash and optimize profitability amid low demand. The industry participants are implementing cost reduction actions, which include limiting discretionary spending, temporarily furloughing employees or reducing work hours, freezing salary hikes, scaling back advertising spend and deferring certain discretionary capital expenditures. These are likely to help the industry in sustaining margins in the wake of weak demand. Further, these companies are making concerted efforts to streamline operations and realign around high growth key markets or customer segments to drive results.
Improvement in Mining & Construction Instils Hope: The rally in gold, silver and iron prices this year, and recovery in copper prices will lead to resumption of spending in the mining industry. This will boost the top line performance of mining equipment manufacturers. In the United States, solid prospects of the housing market backed by rising need for more work-at-home space and record-low mortgage rates are expected to act as a tailwind for construction equipment manufacturers. Also, the government's plans to increase investment in infrastructure construction — particularly in critical subsectors such as transportation, water and sewerage, and telecommunications — should also support demand in the coming years. In China, the government’s stimulus program focused on new infrastructure and urbanization will boost demand for equipment.
Investment in Digital Initiatives to be a Game-Changer: The industry participants are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. This enables manufacturers to make rapid changes to operations to respond to market-based threats or opportunities. Digital transformation aids the organizations in boosting productivity, increasing efficiency, reliability and safety, thereby enhancing customer satisfaction. The companies also remain focused on bringing innovative products into the market equipped with the latest technology.
Zacks Industry Rank Indicates Dim Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim prospects in the near term. The Zacks Manufacturing - Construction and Mining industry, which is part of the broader Zacks Industrial Products Sector currently, carries a Zacks Industry Rank #225, which places it at the bottom 11% of 255 Zacks industries. 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of this year, the industry’s earnings estimate for the current year has plunged 54%.
Despite the industry’s bleak near-term prospects, we will present a few Manufacturing - Construction and Mining stocks that can be retained in one’s portfolio given their prospects in the long haul. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Manufacturing - Construction and Mining industry has outperformed its own sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has gained 23.4% compared with the sector's growth of 15%. Meanwhile, the Zacks S&P 500 composite rallied 14.1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Manufacturing - Construction and Mining companies, we see that the industry is currently trading at 12.16 compared with the S&P 500’s 12.22 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 19.44. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry has traded as high as 14.71 and as low as 7.04, with the median being at 11.13.
3 Manufacturing - Construction & Mining Stocks to Watch Out For
Lonking Holdings: Headquartered in Shanghai, China, the company manufactures and distributes wheel loaders, road rollers, excavators, forklifts, and other construction machinery. It is poised well on the strong demand for construction machinery stemming from the China government’s increased investment in construction and infrastructure, urbanization and transportation, water conservancy and other major construction projects.
The company is also poised to gain on its ongoing focus on cost control, and efforts to increase market share, improve product portfolio and expand its international presence. Also, investment in technology research and development, and acceleration of use of digital technology capabilities will drive growth. The Zacks Consensus Estimate for the company’s current year earnings has moved up 20% over the past 60 days.
The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Caterpillar: Known for its iconic yellow machines, Deerfield, IL-based Caterpillar is the largest global manufacturer of construction and mining equipment. The company continues to monitor end-user demand, commercial shipments, dealer inventory, orders and backlog and has been adjusting production levels accordingly amid the pandemic. In addition to its already completed significant restructuring and cost reduction initiatives that have lowered annual operating costs by about $1.5 billion, the company has reduced costs amid the pandemic.
Caterpillar continues to focus on customers and future by continuing to invest in digital capabilities, connecting assets and jobsites, and developing the next generation of more productive and efficient products. The Zacks Consensus Estimate for the company’s current year earnings has moved up 0.2% over the past 60 days. The company has a trailing four-quarter earnings surprise of 13.1%, on average. Notably, Caterpillar has an estimated long-term earnings growth rate of 12%. The Zacks Ranked #3 (Hold) stock has gained 21% in the past three months.
Terex: The Westport, CT-based company is a global manufacturer of aerial work platforms, materials processing machinery and cranes. Terex is poised to gain on its “Execute, Innovate, Grow” strategy that will focus on driving cash flow and profitability and continue to innovate in products and technology. It continues to invest in innovative products and expansion of manufacturing facilities to ensure future growth while remaining focused on maintaining strong liquidity and cash position. The company’s efforts to rightsize cost structure will help boost margins.
To deliver industry-leading customer service, the company is providing distribution partners easy-to-use digital tools, which will aid them in catering to their customers more efficiently. This maximizes their opportunity to win business. This will provide Terex a competitive edge and accelerate parts growth. The Zacks Consensus Estimate for the company is currently pegged at a loss per share of 41 cents compared with the expectation of a loss of 54 cents per share 60 days ago. The Zacks Ranked #3 stock has gained 33% in the past three months.
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