The Zacks Manufacturing - Construction and Mining industry primarily includes companies which manufacture and sell construction, mining, and utility equipment. The industry participants serve a diverse range of customers utilizing machinery in infrastructure, forestry, heavy and general construction, surface and underground mining operations. The industry also provides support for oil and gas, power generation, marine, rail and industrial applications.
Let us take a look at the three major themes currently governing 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, every company involved in manufacturing bore the brunt of rising steel prices owing to the tariffs. Though this can be mitigated to some extent with price increases, it might not always be feasible to pass on the price increase to customers. Further, the industry has been plagued with shortage of skilled laborers, higher wage costs and flaring-up transportation expenses for quite some time now. Supply-chain challenges stemming from lead-time expansions and elevated freight charges may continue to aggravate costs and dent profits of these companies in the near term.
- Per the Institute for Supply Management’s latest report, Purchasing Managers’ Index (PMI) for April rose 52.8% — exhibiting strong growth in manufacturing for the 32nd consecutive month. The upbeat performance continues to be led by strong production output and persistent strength in new orders, signaling strong economic momentum. The PMI has remained above 50 since the beginning of 2018. Notably, a reading above 50% indicates expansion in manufacturing economy. Over the last 12 months, PMI has averaged 57.2%. Moreover, U.S. manufacturing companies are now hiring more and offering relatively higher wages in the market.
- Continued improvement in residential and non-residential construction, and revival in infrastructure demand bode well for the industry. 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. Further, the recently passed tax reform is likely to act as a catalyst by expediting manufacturing investment in factories, new equipment and other capital goods.
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 #224, which places it at the bottom 12% 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 3%.
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 13.2% against the sector’s decline of 0.9%. Meanwhile, the Zacks S&P 500 composite has gone up 6.1%.
One-Year Price Performance
Manufacturing - Construction and Mining Industry’s Valuation
On the basis of trailing 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 7.7 compared with the S&P 500’s 10.6 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 14.4. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Over the last five years, the industry has traded as high as 12.8 to as low as 6.0, recording the median of 9.0x.
Despite material cost inflation owing to tariffs, improvement in its end markets like residential and non-residential construction; mining driven by ongoing recovery in the commodities, will continue to drive the Manufacturing - Construction and Mining industry. Further, with the U.S. Purchasing Managers Index remaining above 50 since the beginning of 2018, this instils optimism in the space.
We are presenting one stock with a Zacks Rank #1 (Strong Buy), one stock with a Zacks Rank #2 (Buy) and two with Zacks Rank #3 (Hold) that investors may consider betting on. 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 integrated equipment services company sports a Zacks Rank #1. The company has a positive average earnings surprise history of 31.47% over the trailing four quarters. The Zacks Consensus Estimate for 2019 earnings per share (EPS) has moved up 14% over the past 90 days. The estimate for fiscal 2019 reflects year-over-year growth of 16.4%. The company has an estimated long-term earnings growth rate of 10%.
Price and Consensus: HEES
Terex Corporation (TEX): The Zacks Consensus Estimate for current-year earnings per share for this Westport, CT-based manufacturer of lifting and material processing products indicates year-over-year growth of 49%. The estimate for the current fiscal has gone up 16% over the past 90 days. The company has a positive average earnings surprise history of 15.77% over the trailing four quarters. The company has an estimated long-term earnings growth rate of 11.2%.
Price and Consensus: TEX
The Manitowoc Company, Inc. (MTW): The Zacks Consensus Estimate for earnings for this Manitowoc, WI-based crane manufacturer projects growth of 100% for fiscal 2019. The Zacks Consensus Estimate for the bottom line for fiscal 2019 has been revised upward 1% over the past 90 days. The company has a positive average earnings surprise history of 113.94% over the trailing four quarters.
Price and Consensus: MTW
Caterpillar Inc. (CAT): The Zacks Consensus Estimate for current-year earnings for this Deerfield, IL-based mining and construction equipment manufacturer reflects year-over-year growth of 9%. The company has a positive average earnings surprise history of 0.45% over the trailing four quarters. The company has an estimated long-term earnings growth rate of 12%.
Price and Consensus: CAT
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