The Zacks Metal Products - Procurement and Fabrication industry has been reporting strong growth in order and productionlevels over the past few months. As economies started reopening and businesses resumed operations, the industry bounced back from the contractions suffered due to the COVID-19 pandemic. It has been gaining momentum ever since, with orders rolling in. Industry players, including Norsk Hydro ASA NHYDY, Worthington Industries, Inc. WOR and GrafTech International Ltd. EAF, are poised to gain from strong demand levels, cost management, focus on improving efficiency as well as investment in automation.
About the Industry
The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers that transform metal into metal parts, machinery, or components used across various other industries. Their processes include forging, stamping, bending, forming and machining, which are used to shape individual pieces of metal, and welding and assembling to join parts. The companies either use one of these processes or a combination of these. The most common raw materials used by metal fabrication companies include plate metal, formed or expanded metal, tube stock, welding wire or rod, and casting. The industry players serve an array of markets, including construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronics/electrical components, industrial equipment, and general consumer.
What's Shaping the Future of Metal Products - Procurement and Fabrication Industry
Strong Order Levels Bode Well: The pandemic weakened the demand in several of the industry’s end markets, including transportation, mining and industrial, early last year, as customers had to temporarily idle their manufacturing facilities amid the restrictions imposed by the governments globally. Backed by the gradual business reopening, the fabricated metal products industry has come out of the slump, as evident from growth in new orders, production and backlog levels from July 2021. Per the Fed’s latest industrial production report, the aggregate production of fabricated metal products in the United States has been up 9.8% in the fourth quarter of 2021, which followed growth of 2.3% and 3.1% in the third and second quarters, respectively. In February, the industry’s production level improved 2.1% on a year-over-year basis. On a trailing 12-month basis until February, production grew 7.9%.
Higher Costs & Supply-Chain Woes Remain Concerning: The industry is currently facing input cost inflation (mainly steel), and transport and logistic costs. It has been struggling to keep up with the increase in demand due to the shortage of labor, supply-chain issues, high raw material lead times and continued shortages of critical materials. The industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions, which are likely to help sustain margins in this scenario.
Automation & End-Market Growth to Act as Catalysts: The industry’s customer-focused approach to provide cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of the latest and innovative products will drive growth in the days ahead. Growth in end-use sectors such as manufacturing, aerospace and automotive is anticipated to drive the metal fabrication market over the next few years. Developing countries hold promise, courtesy of rapid industrialization, which will likely create demand.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Metal Products - Procurement and Fabrication industry, which is a 13-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #99, which places it at the top 39% of 252 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.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector & S&P 500
The Zacks Metal Products - Procurement and Fabrication industry has underperformed its sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has fallen 15.9% compared with the sector’s decline of 4.4%. Meanwhile, the Zacks S&P 500 composite has gained 14.3% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Metal Products - Procurement and Fabrication companies, the industry is currently trading at 8.84 compared with the S&P 500’s 13.8 and the Industrial Products sector’s forward 12-month EV/EBITDA of 17.05. 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 20.86 and as low as 5.01, with the median at 7.75.
3 Metal Products - Procurement and Fabrication Stocks to Bet On
Norsk Hydro: Higher all-in metal and alumina prices, improved upstream volumes, enhanced margins and volumes in Hydro Extrusions, and better results from Hydro Energy contributed to the solid results in 2021. Backed by these trends, shares of the company have soared 83.5% in a year. The company will benefit from the demand in key segments such as automotive, industrial, can, building and construction. Continued cost savings from improvement program initiatives will boost margins.
The Zacks Consensus Estimate for the company’s current-year earnings has moved north by 60% over the past 90 days. The consensus estimate indicates year-over-year growth of 130%. NHYDY has an estimated long-term earnings growth of 8%. The company currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: NHYDY
Worthington: The company is well-poised for growth through its three-tiered strategy — Transformation, Innovation and Acquisitions. The transformation aspect concentrates on making its businesses more capital-efficient and profitable. The innovation angle is focused on product development, while acquisitions help augment product offerings and add higher-margin businesses. It recently acquired some assets of the U.S. BlankLight business of Shiloh Industries, Inc., which broadened the capacity and capabilities of its laser-welded products business. The completion of Tempel Steel Company in December 2021 makes WOR a leader in the rapidly growing electrical steel market that includes transformers, machine motors and electric vehicle motors. The company is building on its capabilities in automation, analytics and advanced technologies, which, in turn, will help it stay ahead of the curve. Its proactive steps to cut costs and strong end-market demand will aid results.
The Zacks Consensus Estimate for Worthington’s current-year earnings has moved up 16% over the past 90 days. The consensus estimate indicates year-over-year growth of 44%. The company has a trailing four-quarter earnings surprise of 15%, on average. WOR currently carries a Zacks Rank #2 (Buy).
Price and Consensus: WOR
GrafTech International: The company is benefiting from strong market demand and rising graphite electrode prices. Graphite electrode prices are expected to rise further in 2022, which bodes well for EAF. The company has been enhancing its capabilities and improving efficiencies across its manufacturing footprint this year, given the strong demand for graphite electrodes. Its efforts to lower debt levels are also commendable. With the steel industry striving to de-carbonize and many of the efforts being focused on moving away from traditional blast furnace production to electric arc furnace steel production, EAF is well-positioned to benefit.
GrafTech has a trailing four-quarter earnings surprise of 19.1%, on average. The Zacks Consensus Estimate for the company’s current-year earnings has moved up 2% over the past 90 days. The consensus estimate indicates year-over-year growth of 23.8%. The company currently carries a Zacks Rank #2.
Price and Consensus: EAF
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Norsk Hydro ASA (NHYDY) : Free Stock Analysis Report
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