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Manufacturing - Construction & Mining Outlook: Prospects Bright

Madhurima Das

The Zacks Manufacturing - Construction and Mining industry comprises companies that manufacture and sell construction, mining, and utility equipment. The industry participants serve customers utilizing machinery in infrastructure, forestry, heavy and general construction, surface and underground mining operations. The industry players also provide support for oil and gas, power generation, marine, rail and industrial applications.

Let us take a look at the three major themes in the industry:
 

  • Given that steel is a primary raw material in manufacturing, the implementation of tariffs on steel imports into the United States dealt a severe blow to the Manufacturing - Construction and Mining industry. Caterpillar Inc. (CAT), a dominant industry player, resorted to pricing actions and cost control to sustain margins in the wake of the input cost inflation. Further, these companies are making efforts to streamline operations and realign around high growth key markets or customer segments to drive results. These companies are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. This enables manufacturers to make rapid changes to operations to respond to market-based threats or opportunities.
     
  • The U.S.-China trade war and waning global demand have taken a toll on the U.S manufacturing sector. Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) was 47.2% in December — the lowest PMI reading since 46.3% in June 2009, which marked the last month of the Great Recession. The PMI has remained below 50 for five consecutive months. Moreover, industrial production declined 0.3% in December following a 0.8% growth in November and 0.5% fall in October.  Overall, for the fourth quarter, total industrial production declined at an annual rate of 0.5%. The Phase one of the trade deal is likely to aid the sector’s recovery.
     
  • Continued improvement in residential and non-residential construction, and revival in infrastructure demand bode well for the industry. Per Statista, new construction spending in the United States is projected to grow from $1.30 trillion in 2019 to $1.45 trillion in by 2023. Residential construction and non-residential construction spending are projected at approximately $586 billion and $590.4 billion, respectively, in 2023.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Manufacturing - Construction and Mining industry, which is part of the broader Industrial Products Sector currently, carries a Zacks Industry Rank #82, which places it at the top 32% of 255 Zacks industries. 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.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus Broader Market

The Manufacturing - Construction and Mining industry has underperformed its own sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has gained 3.5% compared with the sector’s growth of 14.8%. Meanwhile, the Zacks S&P 500 composite has rallied 23.8%.

One-Year Price Performance



Manufacturing - Construction and Mining Industry’s Valuation

On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Manufacturing - Construction and Mining companies, we see that the industry is currently trading at 9.4 compared with the S&P 500’s 12.7 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 17.8. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio



Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio



Over the last five years, the industry has traded as high as 14.7 and as low as 7.0, with the median being at 11.1x.

Bottom Line

The near-term prospects for the Manufacturing - Construction and Mining industry look bright on improvement in construction markets.  Further, pricing actions, cost control and efforts to streamline operations, focus on high growth key markets and investment in digital initiatives will drive results.

Only one stock in the Manufacturing - Construction and Mining industry space sports a Zacks Rank #1 (Strong Buy). We have also mentioned four stocks from the same industry, which investors can retain as they carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Manitowoc Company, Inc. (MTW): This Manitowoc, WI-based company has a long term expected earnings growth rate of 10%. The company has beat estimates in the trailing four quarters by 216.10%, on average. The company has a Zacks Rank of 1.

Price and Consensus: MTW



H&E Equipment Services, Inc. (HEES): This Baton Rouge, LA-based company has beat estimates in the trailing four quarters by 31.85%, on average. The Zacks Consensus Estimate for 2020 earnings per share suggests year-over-year growth of 8.8%. The company has an estimated long-term earnings growth rate of 11.9%. The company currently has a Zacks Rank of 3.

Price and Consensus: HEES
 


Caterpillar: This Deerfield, IL-based company has an estimated long-term earnings growth rate of 8.8%. The company carries a Zacks Rank #3.

Price and Consensus: CAT
 


Komatsu Ltd. (KMTUY): The Tokyo-based company has an estimated long-term earnings growth rate of 9.3%. The company currently carries a Zacks Rank #3.

Price and Consensus: KMTUY


Terex Corporation (TEX): The Westport, CT-based company currently carries a Zacks Rank #3. The company has beat estimates in the trailing four quarters by 13.15%, on average. The company has an estimated long-term earnings growth rate of 6.5%.

Price and Consensus: TEX



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Terex Corporation (TEX) : Free Stock Analysis Report
 
The Manitowoc Company, Inc. (MTW) : Free Stock Analysis Report
 
Komatsu Ltd. (KMTUY) : Free Stock Analysis Report
 
H&E Equipment Services, Inc. (HEES) : Free Stock Analysis Report
 
Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
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