The pace of growth in the U.S manufacturing sector was the slowest in two and half years in May, primarily affected by the escalating trade war concerns between the United States and China. Per the Institute for Supply Management’s latest report, Purchasing Managers’ Index (PMI) for May came down to 52.1% from 52.8% registered in April and also fell short of the market expectations of 53%.
The manufacturing index has plunged from the high of 60.8% in August 2018 and is currently languishing at its lowest levels over the past 12 months. The latest reading reflects weakest pace of expansion in the manufacturing sector since October 2016 as production growth slumped to its weakest since August 2016 and backlog of orders contracted for the first time since January 2017.
The New Orders Index registered 52.7% in May, up from 51.7% in April. The sector has witnessed growth in new orders for the 41 straight months. Backlog of Orders Index was 47.2% in May, lower than the 53.9% reported in April – the lowest level of performance since October 2016. Production Index was 51.3% in the month, dropping from 52.3% in April but still continues to improve for 33 straight months. The employment index was pegged at 53.7%, up from the April reading of 52.4% and sustaining growth for the 32nd consecutive month.
The implementation of tariffs on steel imports into the United States last year dealt a severe blow to the manufacturing stocks. Given that steel is a primary raw material, every company involved in manufacturing bore the brunt of rising steel prices owing to tariffs. Though this can be mitigated to some extent with price increases, it might not always be feasible to pass on the price increase to customers.
Recently, the Trump administration announced that it will impose a 5% tariff on all imported goods from Mexico beginning June 10. Trump plans to gradually increase that tax to 25% until the flow of undocumented immigrants across the border stops. This new concern regarding a U.S. trade dispute with Mexico along with the ongoing U.S. trade war with China have traders and investors on tenterhooks. Further, the industry has been plagued with shortage of skilled laborers, higher wage costs and flaring-up transportation expenses for quite some time now.
Despite the dip in May, the PMI has averaged 57.7% over the last 12 months. Notably, a reading above 50% indicates expansion in manufacturing sector. This suggests that the sector is holding its own amid the headwinds.
Improvement in residential and non-residential construction as well as infrastructure demand will fuel the sector’s performance. Mining companies are also resuming their capital spending on the back of improvement in commodity prices. Further, the recently-passed tax reform has been acting as a catalyst by expediting manufacturing investment in factories, new equipment and other capital goods. Moreover, the manufacturing companies will continue to combat cost inflation through pricing actions, cost control, increasing productivity and eliminating waste, which will sustain margins.
Despite the abovementioned headwinds, the Zacks Industrial Products sector has rallied 13% year to date, while the S&P 500 witnessed growth of 12.1%.
Earnings for the Industrial Products Sector, one of the 16 broad Zacks sectors, rose 1.2% in the first quarter of 2019 amid input cost inflation. Per the latest Earnings Trends report, the sector is expected to log a decline of 1.3% in earnings in the second quarter of 2019. However, the decline is not limited to this sector alone. In the June-end quarter, nine of the 16 Zacks Sectors are expected to witness drop in earnings. In fact, the Industrial Sector’s decline is anticipated to be the least among all. The scenario is likely to improve in the back half of the year, with projected growth of 3.4% in earnings for the third quarter, followed by rise of 10.3% in the fourth quarter.
We have handpicked five industrial stocks which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, combined with a Zacks Rank #1 or 2, offer the best investment opportunities for investors. You can see the complete list of today’s Zacks #1 Rank stocks here. These companies also have positive earnings growth projections for the ongoing year and a positive earnings surprise history trend.
H&E Equipment Services, Inc. HEES: This Baton Rouge, LA-based company has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for 2019 earnings per share indicates year-over-year growth of 16.43%. The Zacks Consensus Estimate for earnings moved 8% north over the past 90 days. The company has an average positive earnings surprise of 31.47% over the trailing four quarters. The company has an estimated long-term earnings growth of 10.02%.
DXP Enterprises, Inc. DXPE: This Houston, TX-based company has an average positive earnings surprise history of 48.47% over the preceding four quarters. The Zacks Consensus Estimate for fiscal 2019 earnings moved 4% upward over the past 90 days. The estimate suggests year-over-year growth of 22.16%. The company has an estimated long-term earnings growth of 17.50%. The company has a Zacks Rank #2 and a VGM Score of B.
Terex Corporation TEX: This Westport, CT-based company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for fiscal 2019 earnings suggests growth of 48.71%. The estimate for fiscal 2019 moved up 7% over the past 90 days. It has an average positive earnings surprise of 15.77% over the last four quarters. The company has an estimated long-term earnings growth of 8.81%.
The Timken Company TKR: This North Canton, OH-based company currently has a Zacks Rank #1 and a VGM Score of B. Timken has an average positive earnings surprise history of 2.43% over the preceding four quarters and a long-term earnings growth rate of 9.4%. The company’s Zacks Consensus Estimate for fiscal 2019 earnings moved 10% upward over the past 90 days, indicating year-over-year improvement of 26.3%.
AptarGroup, Inc. ATR: This Crystal Lake, IL-based company has a positive average earnings surprise of 8.27% over the last four quarters. The Zacks Consensus Estimate for fiscal 2019 earnings suggests growth of 8.75%. The estimate for fiscal 2019 moved up 3% over the past 90 days. Currently, the stock has a Zacks Rank #2 and a VGM Score of B. The company has an estimated long-term earnings growth of 10.33%.
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