3 Stocks to Watch From the Buoyant Manufacturing Tools Industry
The Zacks Manufacturing-Tools & Related Products industry is poised to gain from improving supply chains, resulting in easier availability of raw materials and faster deliveries. Cost-control measures and investments in product innovation and development augur well for the industry’s growth. These factors point to a rosy outlook for the manufacturing tools industry despite some near-term softness from a slowdown in the manufacturing sector.
Companies like Stanley Black & Decker SWK, Lincoln Electric LECO and Kennametal KMT are well positioned to take advantage of the buoyancy in the industry.
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 signals a low-demand environment for the industry players. Per the Institute for Supply Management (ISM) report, in May, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.9%, contracting for the seventh consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index remained in contraction territory at 42.6%, declining 3.1 percentage points from the figure recorded in April. As recession fears loom large amid a slowdown in the U.S. economy, businesses expect continued softness in demand at least in the near term.
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 eighth straight month in May. 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.
Investments in Product Development & Innovation: The industry participants’ constant focus on innovation, product upgrades and development of new products to stay competitive in the market should drive growth. Focus on expanding product offerings, geographical reach and customer base through strategic acquisitions should continue to drive revenues of these companies.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #120. This rank places it in the top 48% 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 outperform 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 a positive earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group’s 2023 earnings per share has increased 5.8% since the end of March.
Given the industry’s bright near-term prospects, we will present a few noteworthy stocks. 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 underperformed both the S&P 500 composite index and the sector in the past year.
Over this period, the industry has appreciated 13.4%, compared with the sector and the S&P 500 index’s increase of 25.2% and 20%, 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 21.56X compared with the S&P 500’s 19.55X. It is also above the sector’s P/E (F12M) ratio of 16.44X.
Over the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 16.05X, as the chart below shows:
Price-to-Earnings Ratio
Price-to-Earnings Ratio
3 Manufacturing Tool Stocks to Keep a Tab on
Kennametal: Based in Latrobe, PA, Kennametal is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. Resiliency in the core end markets such as general engineering, transportation, aerospace and energy, is expected to drive KMT’s growth in 2023. This Zacks Rank #2 (Buy) company’s innovation capabilities and focus on operational excellence are key catalysts of its growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Kennametal’s fiscal 2023 (ending June 2023) and fiscal 2024 earnings has been revised upward by 12.6% and 13.5%, respectively, in the past 60 days. The stock has gained 20.8% in the past six months.
Price and Consensus: KMT
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. Pricing actions, productivity gains and strength in aerospace and auto markets are expected to fuel SWK’s growth. Cost-reduction efforts are expected to support this Zacks Rank #3 (Hold) company’s margin performance and drive the bottom line. Strategic investments in innovation engine, electrification and commercialization activation should position the company well for sustainable growth and margin expansion.
The Zacks Consensus Estimate for Stanley Black’s 2023 earnings has been revised upward by 14.3% in the past 60 days. The stock has gained approximately 22% in the past six months.
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 orders, strong quoting activity and record backlogs augur well for this Zacks Rank #3 company’s growth. Product launches in the automation solutions market and investments in new technologies, like additive, are expected to bolster LECO’s growth.
The Zacks Consensus Estimate for Lincoln Electric’s 2023 earnings has been revised upward by 3.6% in the past 60 days. The stock has surged 39.4% in the past six months.
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
Kennametal Inc. (KMT) : Free Stock Analysis Report
