The coronavirus pandemic has dealt a severe blow to the Industrial Products sector this year, which had already been reeling under waning global demand and the long-standing U.S-China trade tensions. The pandemic has disrupted global manufacturing activities and supply chains, causing factory closures and production suspensions, significantly dampening consumer demand.
Factors Plaguing the Sector
Per the Institute for Supply Management, the U.S Purchasing Managers’ Index (PMI) came in at 43.1% in May — marking three consecutive months of contraction. Notably, a PMI reading below 50 denotes contraction in the sector. Nevertheless, the May PMI registered 1.6% growth from the April reading of 41.5%, as businesses are resuming operations across most states in the United States.
According to the Federal Reserve, industrial production suffered its sharpest drop of 11.2% in April following a 5.4% slump in March as several factories had to slowdown operations due to the pandemic. After a 6.3% drop in March, the manufacturing output dropped 13.7% in April, marking its steepest decline since February 1946. However, industrial production inched up 1.4% in May, as most factories began resuming operations, while manufacturing output rose 3.8% as motor vehicles and parts registered the largest gains. The numbers in May indicate that the sector is showing signs of a recovery, albeit slow.
Per the Labor department, the United States witnessed a job addition of 2.5 million in May. More than 1.3 million Americans are expected to have filed for unemployment benefits during the week ending Jun 20. The claims have been steadily falling since a record high of 6.86 million in the week ended Mar 28. Nevertheless, these recoveries might be short-lived as a second wave of coronavirus cases seems imminent as restrictions are being eased. With the pandemic-induced uncertainty weighing on the global economy, the International Monetary Fund (IMF) has slashed its outlook for 2020. The IMF now expects a contraction of 4.9% in global gross domestic product for 2020, wider than the contraction of 3% estimated in April. The IMF projects that the United States is expected to contract 8% this year compared to prior expectation of a 5.9% contraction. This is concerning for the manufacturing sector given that it accounts for 11% of the U.S. economy.
YTD Sector & the S&P 500 Performance
So far this year, the Industrial Products sector has fallen 15.4% compared with the S&P 500’s decline of 5.2%. The U.S stock markets have tumbled in the year-to-date period in the wake of the coronavirus pandemic, with investors fearing that rapid spread of the virus and uncertain impact of the same will cause a turbulent economic crisis.
Easing of lockdown restrictions, pick-up in industrial activities, improving oil prices, recent job additions and government stimulus packages have boosted the market sentiment lately. However, the stock market has again started to suffer losses on resurgence of coronavirus cases in some states, offsetting economic recoveries and curbing consumer spending.
What’s in Store for the Industrial Products Sector?
Challenges associated with the COVID-19 crisis will continue to weigh on the sector until the situation stabilizes. The companies in the sector are likely to face end-market pressure as customer spending will likely be restrained. Meanwhile, the industry players are focusing on extensive cost cutting and lean manufacturing actions that will help boost margins.
The slow pick up in manufacturing activities, improved material demand, gradual reopening of economies and government financial stimulus packages will buoy the sector.
Despite the sector’s dismal performance, year to date, there are some Industrial Products stocks that outperformed the S&P 500. These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and also have positive earnings growth expectations for the year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lakeland Industries, Inc. LAKE: This Decatur, AL-based company sports a Zacks Rank #1, at present. The Zacks Consensus Estimate for fiscal 2020 earnings is pegged at 41 cents, suggesting year-over-year growth of 127.8%. The company has surged 116.6% in the year-to-date period.
Broadwind, Inc. BWEN: Cicero, IL-based Broadwind currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2020 earnings is pegged at 17 cents per share, calling for a year-over-year surge of 173.9%. The company’s shares have rallied 124.1%, so far this year.
TPI Composites, Inc. TPIC: This Scottsdale, AZ-based company currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for this year’s earnings is pinned at 44 cents per share, indicating a year-over-year jump of 197.7%. The company has a trailing four-quarter average positive earnings surprise of 17.8%. Its shares have gained 19.2% in the year-to-date period.
Axon Enterprise, Inc. AAXN: Based in Scottsdale, AZ, this company has a long-term estimated earnings growth rate of 15% and currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the current-year earnings is pegged at $1.18, suggesting 13.5% growth, year on year. The company has a trailing four-quarter positive earnings surprise of 30.6%, on average. Its shares have climbed 31% so far this year.
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