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Diversified Operations Industry: Near-Term Prospects Bright

Zacks Equity Research

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:
 

  • Multi-sector companies’ prospects are closely linked to operating conditions of the end markets. Some factors that currently work in favor of the industry are rising global demand for air travel, improving operations in the oil and gas industry, demand from the defense and governmental fronts, infrastructure development, and technological upgrade in manufacturing processes. On a broader note, favorable labor market conditions, changes in tax policies, growth in manufacturing activities and governmental development plan are boons for multi-sector companies.
     
  • Efforts to keep pace with the rising demand for technologically-advanced products are prompting multi-sector companies to invest in innovation. Though such initiatives help in tapping demand from existing and new customers, they often make the players more leveraged, exerting extra burden on margins. Also, companies are dealing with the adverse impacts of U.S. trade disputes with China and other countries due to the imposition of import tariffs on an array of products by Trump administration. Inflationary pressure, rising freight charges, scarcity of skilled workforce, geopolitical tensions and unfavorable movements in foreign currencies are adding to the woes. It’s worth mentioning here that the IMF has revised down its global growth forecast by 20 basis points to 3.3% for 2019. The United States is currently predicted to grow 2.3% this year.
     
  • We believe that profits in one or more businesses of multi-sector companies can make up for losses incurred by others. However, diversification, if not handled properly, can be concerning. Industrial giant General Electric Company (GE) is currently facing problems in its power and finance-related businesses. However, the company hopes to have addressed the concerns by splitting the power business in two, divestment of its transportation business and following measures to limit its exposure to finance-related operations. Another conglomerate United Technologies Corporation (UTX) has planned to divide its businesses into three independent companies — United Technologies, Otis and Carrier — to bring in more customised solutions for customers and create greater shareholder value.   


Zacks Industry Rank Indicates Bright Prospects

The Zacks Diversified Operations industry is a 20-stock group within the broader Zacks Conglomerates sector. The industry currently carries a Zacks Industry Rank #100, which places it in the top 39% 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.

We will present a few stocks that may be considered 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 on Shareholders Return

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 25.5% year to date versus the S&P 500’s growth of 17%.



                                       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 27.05. This multiple is way above the S&P 500’s forward 12-month EV/EBITDA ratio of 11.81.

Over the past five years, the industry has traded at the highest level of 81.18x forward 12-month EV/EBITDA ratio and lowest level of 17.61x. The median level, over the same period, was 20.93x.

       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. Majority of the stocks within this 20-stock industry currently carry a Zacks Rank #3 (Hold), 4 (Sell) or 5 (Strong Sell). Nonetheless, we present four stocks, with a favorable rank and bright earnings prospects that investors might be interested in.

Carlisle Companies Incorporated (CSL): This Scottsdale, AZ-based company currently sports a Zacks Rank #1 (Strong Buy). Since the beginning of 2019, the stock has increased nearly 39.8%. Also, the company’s prospects appear bright as the Zacks Consensus Estimate for 2019 earnings has improved 5.1% to $7.80 per share in the past 60 days.

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















                                            Price and Consensus: CSL



Macquarie Infrastructure Corporation (MIC): This New York-based company currently sports a Zacks Rank #1. Year to date, the stock has gained nearly 16.3%.

Also, the company’s Zacks Consensus Estimate for 2019 earnings has increased 0.6% to $4.81 per share in the past 60 days.

                                           Price and Consensus: MIC



Honeywell International Inc. (HON): The stock of this Morris Plains, NJ-based company has increased 31.4% since the beginning of the year. It’s worth mentioning that the company currently carries a Zacks Rank #2 (Buy). Also, the Zacks Consensus Estimate for 2019 earnings has improved 2.1% to $8.10 per share in the past 60 days.

                                          Price and Consensus: HON


 
Federal Signal Corporation (FSS): The stock of this Oak Brook, IL-based company has increased 38% since the beginning of the year. The Zacks Consensus Estimate for 2019 earnings has been revised 0.6% upward to $1.56 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
 
                                            Price and Consensus: FSS



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