4 Top Stocks From the Promising Industrial Manufacturing Industry
While the manufacturing sector remains in the contraction territory, signs of gradual improvement augur well for the Zacks Manufacturing – General Industrial industry. Improving supply chains and reduced delivery lead times are expected to drive the industry’s growth in the near term. Focus on inorganic activities and investments in product upgrades and innovation are expected to bolster the industry’s growth.
Companies like Ingersoll Rand IR, RBC Bearings RBC, Flowserve Corporation FLS and Graham Corporation GHM are well-placed to capitalize on the buoyancy in the industry.
About the Industry
The Zacks Manufacturing – General Industrial industry comprises companies 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 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 the mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation and utilities industries.
3 Trends Shaping the Future of the Manufacturing General Industrial 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 July, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.4%, contracting for the ninth consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index has remained in contraction territory for the past several quarters, registering 47.3% in July. While the manufacturing sector remains weak, it is contracting at a slower pace. In July, the Manufacturing PMI increased 0.4 percentage points from the June figure, while new orders rose 1.7 percentage points. Signs of improvement in the manufacturing sector are a boon for the industry.
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 tenth straight month in July. Easing supply chain issues should support industrial manufacturing companies’ growth in 2023.
Acquisition-Based Growth Strategy: The industry participants focus on an acquisition-based growth strategy to expand their network and product offerings. This helps them foray into new markets and solidify their competitive position. Exposure to various end markets help industrial manufacturing companies offset risks associated with a single market. Continuous investments in product development and innovation, automation and technological advancements augur well for the industry’s growth.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Manufacturing – General Industrial industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #64. This rank places it in the top 26% 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 positive earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group’s 2023 earnings per share has increased 7% since the end of January.
Given the industry’s bright near-term prospects, we will present a few stocks, worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Outperforms Both Sector & S&P
The Zacks Manufacturing – General Industrial industry has outperformed both the broader sector and the Zacks S&P 500 composite index over the past year.
Over this period, the industry has appreciated 10.7% compared with the sector and the S&P 500 Index’s increase of 7.2% and 6.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month Price-to-Earnings (P/E), which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 18.51X compared with the S&P 500’s 19.03X. It is also above the sector’s P/E ratio of 15.93X.
Over the past five years, the industry has traded as high as 26.96X, as low as 14.92X and at the median of 19.39X as the chart below shows.
Price-to-Earnings Ratio
Price-to-Earnings Ratio
4 Manufacturing-General Industrial Stocks Leading the Pack
Graham: Headquartered in Batavia, NY, Graham designs and builds vacuum and heat transfer equipment for process industries and energy markets worldwide. Strength in the defense market and recovery in the commercial aftermarket are expected to drive this Zacks Rank #1 (Strong Buy) company’s growth. The company’s healthy margin performance due to favorable pricing and improved execution is encouraging. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Graham’s fiscal 2024 earnings has been revised upward by 66.7% in the past 60 days. Shares of the company have surged 62.2% in a year.
Price and Consensus: GHM
Flowserve: Headquartered in Irving, TX, Flowserve is a leading manufacturer and aftermarket service provider of comprehensive flow control systems, globally. The company, flaunting a Zacks Rank #1, is thriving on the back of strong maintenance, repair and operations and aftermarket activity. It logged bookings of more than $1 billion for six consecutive quarters. The uptrend in bookings is expected to continue through 2024, thus driving FLS’ growth. The acquisition of Velan, expected to be completed in the third quarter of 2023, is expected to bolster FLS’ growth by strengthening its valves portfolio.
The Zacks Consensus Estimate for Flowserve’s 2023 earnings has been revised upward by 8.8% in the past 60 days. Shares of the company have appreciated 16.7% in a year.
Price and Consensus: FLS
Ingersoll Rand: Headquartered in Davidson, NC, Ingersoll Rand is a global industrial company, with expertise in industrial and mission-critical flow creation technologies. IR, carrying a Zacks Rank #2 (Buy), is well placed for future growth on the back of solid product portfolio, innovation capabilities and focus on boosting aftermarket businesses. Pricing actions and acquired assets are driving the company’s top line. The company recently completed the acquisition of Howden Roots, expanding its product portfolio with incremental low-pressure compression and vacuum technologies. IR expects the buyout to generate adjusted EBITDA margins of more than 30% by the third year.
The Zacks Consensus Estimate for Ingersoll Rand’s 2023 earnings has been revised upward by 1.5% in the past 60 days. Shares of the company have rallied 34.8% in a year.
Price and Consensus: IR
RBC Bearings: Headquartered in Oxford, CT, RBC Bearings manufactures and distributes engineered bearings and precision components. Strength in the cement, food and beverage, mining and metals and general industrial end markets within the Industrial segment is expected to fuel this Zacks Rank #2 company’s growth. The recent acquisition of Specline, which has expanded RBC’s aerospace product offerings, is expected to foster its growth.
The Zacks Consensus Estimate for RBC Bearings’ 2023 earnings has been revised upward by 4.2% in the past 60 days. While shares of the company have declined 12.3% in a year, it increased 6.1% in the year-to-date period.
Price and Consensus: RBC
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Ingersoll Rand Inc. (IR) : Free Stock Analysis Report
RBC Bearings Incorporated (RBC) : Free Stock Analysis Report
Flowserve Corporation (FLS) : Free Stock Analysis Report
Graham Corporation (GHM) : Free Stock Analysis Report
