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4 Stocks to Outshine the Thriving Industrial Manufacturing Industry

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·8 min read
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The Zacks Manufacturing – General Industrial industry has been benefiting from improvement in domestic and international orders for industrial products. With widespread adoption of COVID-19 vaccines, the industry is anticipated to continue benefiting from rise in economic activities and technological advancement in manufacturing processes, supported by growth in the e-commerce business.

Industry players like Illinois Tool Works Inc. (ITW), Parker-Hannifin Corporation (PH), Xylem Inc. (XYL) and Graco Inc. (GGG) are poised to capitalize on these opportunities. However, lingering effects of the pandemic and high costs related to the frequent upgrade of products have marred the outlook of the industry participants.

About the Industry

The Zacks Manufacturing – General Industrial industry comprises companies that are engaged in the production of a wide range of industrial equipment.

Some industry players offer power transmission products, bearings, engineered fluid power components and systems, industrial rubber products, vapor-abrasive blasting equipment, vehicle-powered truck refrigeration systems, adhesive, gel coat equipment, flow-control components, safety products, and linear motion components. In addition, industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.

The companies provide services to original equipment manufacturing, and maintenance, repair and overhaul customers. These end users belong to industries such as mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation, and utilities.

What’s Shaping the Future of Manufacturing General Industrial Industry

Growth in Domestic Demand & Export Orders: The industry has been performing well ever since the economy reopened post the COVID-19 induced lockdown, with consistent rise in manufacturing activities. The industry participants have resorted to maintaining the production level per the growth in domestic and international orders for industrial products. Per the latest Institute for Supply Management’s (“ISM”) report released on May 3, U.S. manufacturing activity expanded for the 11th month in a row in April. Notably, the ISM’s manufacturing index registered 60.7% in April. Also, ISM’s measure of production in the same month was 62.5%, reflecting growth for the 11th consecutive month. In addition, new orders registered 64.3%, marking the 11th consecutive month of increase. Further, new export orders rose to 54.9% from 54.5% in the previous month. This indicates the consistent recovery of economic activities in the manufacturing sector as more companies are ramping up production with firm orders. Further, growth in the e-commerce business has opened up opportunities for the industry participants.

Benefits From Technological Progress: Technological advancement in manufacturing processes have been benefiting the industrial manufacturing companies. Notably, several manufacturers have been working on digitizing their business operations, which has been allowing them to gain detailed insight into their operational performances, demand patterns and supply-chain issues. This, in turn, has been helping them to improve product quality along with boosting operational productivity, and lowering costs, thus, improving competitiveness. In addition, the Federal Reserve’s easing policy to support the pandemic hit economy is likely to continue aiding the industrial manufacturers.

Existing Woes: Despite the positives, some participants from the industry still remain wary of the lingering effects of the coronavirus-related issues on their businesses. Also, the industrial manufacturers have to invest frequently to upgrade products and services to stay competitive in the market. Such frequent investments often hurt profitability and margins of industry participants. In addition, several players are facing uncertain demand environment due to the difficult Sino-U.S. trade relations apart from highly leveraged balance sheets.

Zacks Industry Rank Indicates Strong Prospects

The Manufacturing – General Industrial industry is a 66-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #119, which places it in the top 47% 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 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 is a result of improved earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2021 have increased 10% on a year-to-date period.

Before we discuss a few stocks from the industry, it is worth taking a look at the industry’s shareholder returns and its current valuation.

Industry Outperforms S&P 500 & Lags Sector

The Zacks Manufacturing – General Industrial industry has outperformed the S&P 500, while it has underperformed the sector in the past year. While stocks in the industry have collectively gained 60.9%, the S&P 500 and the Zacks Industrial Products sector have grown 44.5% and 70%, respectively.

One-Year Price Performance

Manufacturing – General Industrial Industry’s Valuation

Price/Earnings (P/E) ratio is commonly used for valuing manufacturing stocks.

The industry’s forward 12-month P/E ratio is 26.65. This clearly shows that the industry is trading above the sector’s forward 12-month P/E ratio of 22.73, and the S&P 500’s 22.02.

Over the past five years, the industry has traded at the highest level of 27.15x forward 12-month P/E and the lowest level of 15.44x. The median level over the same period was 20.44x.

Manufacturing–General Industrial Industry’s Valuation Versus S&P 500

Manufacturing–General Industrial Industry’s Valuation Versus Sector

4 Manufacturing–General Industrial Stocks to Consider

Below, we have discussed four stocks from the industry that have strong growth opportunities despite the prevalent pandemic uncertainties. The stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Illinois Tool Works: Based in Glenview, IL, the company is a worldwide manufacturer of highly engineered products and specialty systems. It seems poised to gain from a diversified business structure, solid product offerings and the policy of rewarding shareholders. Also, its enterprise initiatives are expected to aid. For 2021, the company anticipates organic revenue growth of 10-12% compared with an increase of 7-10% expected previously.

Shares of the company have gained 47.3% in the past year. It reported better-than-expected results in each of the last four quarters, with the earnings surprise being 28.05%, on average. Also, the company’s earnings estimates have improved 5.3% for 2021 and 6.3% for 2022 in the past 30 days.

Price and Consensus: ITW

Parker-Hannifin: Headquartered in Cleveland, OH the company is a global diversified manufacturer of motion & control technologies and systems. The company provides precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. It is poised to benefit from strength in its end markets, synergistic gains from acquired assets and its unique Win Strategy. For fiscal 2021 (ending June 2021), it anticipates year-over-year sales growth of 4-5% compared with growth of 0.7-2.7% projected earlier.

The company has gained 96.3% in the past year. It reported better-than-expected results in each of the last four quarters, with the earnings surprise being 37.36%, on average. In the past 30 days, the company’s earnings estimates have moved up 4.2% for fiscal 2021 and 5% for fiscal 2022 (ending June 2022).

Price and Consensus: PH

Xylem: Based in Rye Brook, NY, Xylem is a leading provider of water solutions worldwide. The company is involved in the full water-process cycle, including collection, distribution and returning of water to the environment. It stands to benefit from solid product offerings, focus on innovation, diversified business structure and healthy liquidity position. Also, its cost-saving measures and shareholder-friendly policy might drive growth. For 2021, the company anticipates revenue growth of 8-10% or 5-7% organically on a year-over-year basis.

Shares of the company have gained 88.5% in the past year. It reported better-than-expected results in each of the trailing four quarters, with the earnings surprise being 22.63%, on average. The company’s earnings estimates have improved 1.2% for 2021 and 0.6% for 2022 in the past 30 days.

Price and Consensus: XYL

Graco: The Minneapolis, MN-based company manufactures, designs and sells equipment and systems used to measure, move, control, spray and dispense fluid as well as powder materials. The company seems well-placed to gain from its exposure in new markets, global expansion, buyouts and end-user conversion in the long term.

Shares of this company have returned 69.7% in the past year. It reported better-than-expected results in each of the last four quarters, with the earnings surprise being 28.28% on average. The company’s earnings estimates have improved 6.4% for 2021 and 5.9% for 2022 in the past 30 days.

Price and Consensus: GGG

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Xylem Inc. (XYL) : Free Stock Analysis Report

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Illinois Tool Works Inc. (ITW) : Free Stock Analysis Report

Graco Inc. (GGG) : Free Stock Analysis Report

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