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Diversified Operations Industry Near-Term Prospects Bright

Payal Jalan

The Zacks Diversified Operations industry includes companies that operate in various end-markets like oil & gas, industrial, aviation, technology, finance, healthcare and transportation among others. Such companies manufacture and provide equipment, solutions and related services to a vast customer base.

In addition, there are a few companies that provide services in the agriculture, marine and telecommunications markets and are also engaged in providing environmental and safety solutions.

Here are the industry’s three major themes:

  • Industry players are benefiting from their exposure to multiple end markets. Tailwinds that have been supporting growth include impressive activities in the oil & gas market, rising demand from customers in the defense and governmental markets and increasing global demand for air travel. Honeywell International (HON) is one such company that is gaining extensively from defense, commercial aerospace and aerospace aftermarket businesses. Its Aerospace business segment accounted for 38% of the company’s revenues in the second quarter of 2019. In addition to the abovementioned tailwinds, infrastructure development, governmental development plan and changes in tax policies are positives.

  • Technological upgrade in manufacturing processes has been keeping industry players busy with innovation. Such initiatives help in tapping demand from existing and new customers but can make the players more leveraged. Also, the companies are dealing with the adverse impact of the trade tiffs between the United States and other foreign nations, especially China. The issue had its adverse impact on corporate margins. Also, increasing geopolitical tensions, Brexit, inflationary pressure, rising freight charges, scarcity of skilled workforce and unfavorable movements in foreign currencies are adding to the woes. Growth projection of the global economy was lowered 0.1% for both 2019 and 2020 by the International Monetary Fund in July.

  • Though diversification is usually considered a boon (as profits in one or more businesses can make up for losses incurred by others), if not handled properly, it can be concerning. Conglomerate 3M Company (MMM) divested its communication markets business in 2018 and sold its gas and flame detection business in August this year. Also, it is working on selling its advanced ballistic-protection business. Another player United Technologies Corporation (UTX) plans to divide its businesses into three independent companies — United Technologies, Otis and Carrier. It expects the move to help it create more customized solutions for customers and create greater shareholder value. Also, industrial giant General Electric Company (GE) split its power business into two to address the prevailing headwinds. It is also working on lowering its exposure to finance-related operations and has already divested its transportation business.

Zacks Industry Rank Suggests Solid Prospects

The Zacks Diversified Operations industry is a 19-stock group within the broader Zacks Conglomerates sector. The industry currently carries a Zacks Industry Rank #25, which places it in the top 10% 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 promising 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 healthy 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. Since the start of third quarter of 2019, the industry’s earnings estimates have increased 0.9% for 2019 and 1.5% for 2020.

We will present a few stocks that you may consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500

The Zacks Diversified Operations industry’s performance has been better than the S&P 500 since the beginning of 2019. The stocks in this industry have collectively increased 18.3% year to date compared with the S&P 500’s increase of 17.5%.

                                         Year-to-date Price Performance

Diversified Operations Industry’s Valuation

EV/EBITDA ratio is commonly used for valuing companies with diversified operations.

The industry’s forward 12-month EV/EBITDA ratio is 24.52. This multiple is way above the S&P 500’s forward 12-month EV/EBITDA ratio of 11.84.

Over the past five years, the industry has traded at the highest level of 81.18X forward 12-month EV/EBITDA and lowest level of 17.61X. The median level, over the same period, was 21.17X.

Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus S&P 500

Bottom Line

Business opportunities seem impressive for the Diversified Operations industry as many conglomerates are gaining from improved demand across various end markets served, favorable governmental policies and others.

Investment in the industry might be a wise move at the moment. We present four stocks with a favorable rank and bright earnings prospects that investors might be interested in.

Griffon Corporation (GFF): Shares of this New York-based company have soared 82.7% year to date. The stock currently sports a Zacks Rank #1 (Strong Buy). Its investment appeal is further accentuated by a favorable VGM Score of B.

You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been revised 19.1% and 18.3% upward, respectively.

                                            Price and Consensus: GFF

Federal Signal Corporation (FSS): Based in Oak Brook, IL, shares of this company have surged 61.8% so far this year. The stock currently is Zacks #1 Ranked and has a VGM Score of B.

In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been raised 9.6% and 10.9% respectively.

                                       Price and Consensus: FSS

Carlisle Companies Incorporated (CSL): This Scottsdale, AZ-based company currently carries a Zacks Rank #2 (Buy) and has a VGM Score of B. Since the beginning of 2019, the stock has increased nearly 47%.

The company’s prospects appear bright as the Zacks Consensus Estimate has improved 4.4% for the current year and 3.8% for the next year in the past 60 days.

                                        Price and Consensus: CSL

Danaher Corporation (DHR): This Washington-based company currently holds a Zacks Rank #2. Since the beginning of 2019, the stock has increased nearly 35.3%.

In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been raised 0.4% and 1.1%, respectively.

                                         Price and Consensus: DHR

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United Technologies Corporation (UTX) : Free Stock Analysis Report
3M Company (MMM) : Free Stock Analysis Report
Honeywell International Inc. (HON) : Free Stock Analysis Report
Griffon Corporation (GFF) : Free Stock Analysis Report
General Electric Company (GE) : Free Stock Analysis Report
Federal Signal Corporation (FSS) : Free Stock Analysis Report
Danaher Corporation (DHR) : Free Stock Analysis Report
Carlisle Companies Incorporated (CSL) : Free Stock Analysis Report
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