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3 Manufacturing Tool Stocks With Healthy Prospects Amid Pandemic

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Payal Jalan
·8 min read
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Players in the Zacks Manufacturing-Tools & Related Products industry are benefiting from the pandemic-induced demand for certain product categories, improving manufacturing activities and a surge in business on the e-commerce platform. Also, any incremental spending to strengthen the nation’s infrastructure under the newly-formed government will be added advantage for the industry players. However, prevailing end-market challenges due to the pandemic are concerning the players to some extent.

Three companies namely Stanley Black & Decker, Inc. (SWK), Lincoln Electric Holdings, Inc. (LECO) and Kennametal Inc. (KMT) have healthy earnings prospects in the present scenario.

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 motion-control systems. Arc welding products, oxy-fuel cutting equipment, plasma cutters, storage system and other related products are also produced by some tool-makers.

The highly-advanced tools are used in industrial, commercial, oil & gas, mining, automotive, and other industries. Providers of electronic security solutions cater to commercial, retailers, government, financial and healthcare markets.

What’s Shaping the Future of Manufacturing Tools Industry

Improving Operating Environment: The industry players seem to be benefiting from the revival in manufacturing activities as the restrictions related to the pandemic have been relaxed considerably. Key indicators are the country’s industrial production and the ISM Purchasing Managers' Index (“PMI”). Industrial production advanced 1.6% month over month in December 2020 as compared with a 12.7% decline in April. Then again, ISM’s PMI was at 60.7% in December versus 41.5% in April. Notably, an index above 50% means expansion in manufacturing activities. Further, any incremental investments in infrastructural development under the Joe Biden government might be added tailwind for the industry players.

Pandemic-Induced Tailwinds: Amid the pandemic, preferences for do-it-yourself products as well as those related to security and health have been rising. Stanley Black & Decker is well-placed to benefit from the trend. Investments to tap growth opportunities within its Tools & Storage, and Security segments have been a priority for the company in the second half of 2020. Also, the pandemic made e-commerce an important growth avenue for companies like Enerpac Tool Group Corp. (EPAC).

Pandemic Woes: The pandemic-related uncertainties and its possible impact on operations are still concerning for the industry players. For instance, industrial tool maker Enerpac Tool’s performance in first-quarter fiscal 2021 (ended Nov 30, 2020) was severely impacted by the pandemic. Also, it refrained from giving guidance for fiscal 2021 (ending August 2021). With similar concerns, Kennametal avoided providing projections for fiscal 2021 (ending June 2021).

High Leverage: Addressing the changing needs of customers makes innovation and constant upgradation unavoidable in the present environment. Investments in these fronts along with engagement in other endeavors like acquisitions often leave companies with a highly leveraged balance sheet. Notably, the industry’s long-term debt was $2,288 million at the end of the third quarter of 2020, reflecting an increase of 22.2% from the previous quarter and a 41.6% rise from the end of 2019.

Zacks Industry Rank Indicates Bright Prospects

The Manufacturing-Tools & Related Products industry is a five-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #94, which places it in the top 37% 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 healthy prospects in the near term. 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 resulted from strengthening earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. From the end of April 2020, the industry’s earnings estimates for 2021 have been increased by 22.3%.

Before we discuss a few stocks in the industry, let’s take a look at the industry’s shareholder returns and current valuation.

Industry Underperforms S&P 500 & Sector

The Zacks Manufacturing-Tools & Related Products industry has underperformed both the S&P 500 and the sector in the past year.

While the industry players have collectively lost 9.3%, the sector has gained 23.1%. The S&P 500 has rallied 17.8% in the said time frame.

                                        One-Year Price Performance



 

Manufacturing-Tools & Related Products Industry’s Valuation

P/E ratio is one of the commonly used methods for valuing manufacturing tools and related products stocks.

The industry’s forward 12-month P/E ratio is 16.3. This clearly shows that the industry is trading below the S&P 500’s forward 12-month P/E ratio of 23.34 and the sector’s 24.

Over the past five years, the industry has traded at the highest level of 21.45X forward 12-month P/E and the lowest level of 12.49X. The median level over the same period was 16.91X.

            Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500





       

           Industry’s P/E Ratio (Forward 12-Month) Versus Sector



 

3 Industrial Tool Stocks to Consider or Keep Close Eye On

Below we have discussed three stocks from the industry, carrying a Zacks Rank #2 (Buy) or Zacks Rank #3 (Hold), which can be on investors’ watch list.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stanley Black & Decker: The company specializes in making industrial tools (power and hand tools) and related accessories. It also provides electronic security solutions, healthcare solutions, engineered fastening systems and other services. Solid product offerings, efforts to innovate, a surge in the e-commerce business, and a shift in customer preferences for security and health-related products are set to benefit the company. However, challenges related to the pandemic remain concerning. The company currently carries a Zacks Rank #3.

Shares of this New Britain, CT-based company have gained 5.1% in the past year. It reported better-than-expected results in the last four quarters, with an earnings surprise of 10.34%, on average. Also, the company’s earnings estimates have improved by 3.2% for 2021 in the past 60 days. In the next five years, its earnings are expected to increase 6.7%.

                                                Price and EPS: SWK





 

Lincoln Electric: The company engages in making welding and cutting products for use in multiple industries, including petrochemical, transportation and fabrication. Innovative products, synergistic gains from buyouts, the use of digital platforms and cost-management initiatives are likely to benefit it in the quarters ahead. However, the COVID-related woes might continue hurting. The company currently carries a Zacks Rank #3.

The stock of this Cleveland, OH-based company has gained 27.6% in the past year. It delivered better-than-expected results in three of the last four quarters and met estimates in one. Average earnings surprise for the last four quarters was 44.08%. In the past 60 days, the company’s earnings estimates have moved up by 1.3% for 2021. Earnings are predicted to grow 10% in the next five years.



                                                 Price and EPS: LECO





 

Kennametal: The company specializes in making and distributing high-speed metal cutting tools, tooling systems and wear-resistant parts. Its diversified business structure, simplification/modernization initiatives, innovations abilities and cost-reduction actions will likely benefit in the quarters ahead. The pandemic-related woes are also concerning. The company presently carries a Zacks Rank #2.

Shares of this Latrobe, PA-based company have gained 11.2% in the past year. It reported better-than-expected results in three of the last four quarters and lagged in one, with an earnings surprise of 27.06%, on average. Also, the company’s earnings estimates have improved by 6.3% for fiscal2021 (ending June 2021) in the past 60 days. In the next five years, its earnings are expected to increase 5%.

                                                   Price and EPS: KMT




 

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Stanley Black & Decker, Inc. (SWK) : Free Stock Analysis Report
 
Lincoln Electric Holdings, Inc. (LECO) : Free Stock Analysis Report
 
Kennametal Inc. (KMT) : Free Stock Analysis Report
 
Enerpac Tool Group Corp. (EPAC) : Free Stock Analysis Report
 
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