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Manufacturing - Construction & Mining Outlook: Prospects Dim

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:
 

  • The implementation of tariffs on steel imports into the United States last year dealt a severe blow to the Manufacturing - Construction and Mining industry. Given that steel is a primary raw material in manufacturing, every company bore the brunt of rising steel prices. 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.
     
  • After exhibiting growth for 35 consecutive months, the U.S manufacturing sector contracted in August primarily owing to the U.S.-China trade turbulence. Per the Institute for Supply Management’s latest report, Purchasing Managers’ Index (PMI) for August declined to 49.1% from 51.2% in July — lowest reading since January 2016’s reading of 48%. Industrial production had also declined 0.2% in July. This follows a decline of 1.2% in the second quarter — second consecutive quarterly decrease. Any positive development on the United States-China trade war front will aid the sector’s recovery.
     
  • Mining companies are also resuming capital spending on the back of rising commodity prices. Notably, oil and gas extraction is driving improvement in the mining sector. 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 $1.29 trillion in 2018 to $1.45 trillion in by 2023. Residential construction and non-residential construction spending are projected at approximately $586 billion and slightly more than $590.4 billion, respectively, in 2023.
     

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy 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 #232, which places it at the bottom 9% of 256 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of this year, the industry’s earnings estimate for the current year has declined 6%.

Despite the bleak near-term prospects, we will present a few Manufacturing - Construction and Mining stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms Sector & S&P 500

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 fallen 9.4% compared with the sector’s decline of 8.9%. Meanwhile, the Zacks S&P 500 composite has gained 3.1%.

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 7.3 compared with the S&P 500’s 11.8 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 15.2. 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 6.9, with the median being at 7.3x.

Bottom Line

The near-term prospects for the Manufacturing - Construction and Mining industry look bleak as the ongoing U.S-China trade tensions are weighing on manufacturing activity and inflating material costs. However, going forward improvement in its end markets like construction, mining will drive the industry.

None of the stocks in the Manufacturing - Construction and Mining industry space currently sport a Zacks Rank #1 (Strong Buy) or Rank #2 (Buy). Below, we have 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.

H&E Equipment Services, Inc. (HEES): This Baton Rouge, LA-based company has a positive average earnings surprise history of 28.59% over the trailing four quarters. The Zacks Consensus Estimate for 2019 earnings per share (EPS) suggests year-over-year growth of 16.12%. The company has an estimated long-term earnings growth rate of 10.66%.

Price and Consensus: HEES



The Manitowoc Company, Inc. (MTW): This Manitowoc, WI-based company has a long term expected earnings growth rate of 10%. The Zacks Consensus Estimate for earnings for fiscal 2019 indicates improvement of 165.36%. The Zacks Consensus Estimate for the bottom line for fiscal 2019 has been revised upward 5% over the past 30 days. The company has a positive average earnings surprise history of 237.69% over the trailing four quarters.

Price and Consensus: MTW



Caterpillar: The Zacks Consensus Estimate for current-year earnings for this Deerfield, IL-based company indicates year-over-year growth of 4.57%. The company has an estimated long-term earnings growth rate of 12%.

Price and Consensus: CAT



Komatsu Ltd. (KMTUY): The Zacks Consensus Estimate for current-year earnings per share for this Tokyo-based company has appreciated 6% over the past 30 days. The company has an estimated long-term earnings growth rate of 9.38%.

Price and Consensus: KMTUY



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The Manitowoc Company, Inc. (MTW) : Free Stock Analysis Report
 
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Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
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