Art's-Way Manufacturing Co Inc (NASDAQ:ARTW), a USD$9.77M small-cap, is a machinery manufacturing company operating in an industry, which faces increasing demand of capital equipment and machinery from developing economies in Asia, Latin America and the Middle East. Capital goods analysts are forecasting for the entire industry, a positive double-digit growth of 22.42% in the upcoming year, and an enormous growth of 36.08% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Today, I will analyse the industry outlook, and also determine whether ARTW is a laggard or leader relative to its capital goods peers. View our latest analysis for Art's-Way Manufacturing
What’s the catalyst for ARTW's sector growth?
Machinery manufacturers face the challenge of managing a plethora of new data so that it becomes useful, adapt technology to run their supply chains and operations more efficiently, and build strategic partnerships that will help grow market share. In the previous year, the industry saw growth of 0.21%, though still underperforming the wider US stock market. ARTW lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its machinery peers. As the company trails the rest of the industry in terms of growth, ARTW may also be a cheaper stock relative to its peers.
Is ARTW and the sector relatively cheap?
The machinery sector's PE is currently hovering around 28x, above the broader US stock market PE of 22x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry returned a similar 10.61% on equities compared to the market’s 9.99%. Since ARTW’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ARTW’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ARTW has been a machinery industry laggard in the past year. If your initial investment thesis is around the growth prospects of ARTW, there are other machinery companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ARTW fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ARTW has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its machinery peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ARTW’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Art's-Way Manufacturing's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other capital goods stocks instead? Use our free playform to see my list of over 100 other machinery companies trading on the market.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.