The coronavirus pandemic seems to have brought the U.S manufacturing sector to a standstill. Per the Federal Reserve, industrial production slumped 11.2% in April — the worst drop in the 101-year history of the index, as several factories had to slowdown or suspend operations owing to the pandemic. Manufacturing output fell 13.7% in April, the steepest decline on record. Performance was affected by decline in most major industries, especially in motor vehicles and parts, which fell 70. Capacity utilization for the industrial sector was down 8.3 percentage points to 64.9% in April.
The Manufacturing Purchasing Managers’ Index (PMI) came in at 41.5% for April, per the Institute for Supply Management. Notably a reading below 50 denotes contraction. The PMI in April hit the lowest level since April 2009, when it registered 39.9%. The 7.6-percentage point decrease from March is the largest one-month decline since the 9-percentage point decrease witnessed in October 2008. Contraction was noted in production, new orders, and employment. Of the 18 manufacturing industries, only two reported growth in April – Paper Products and Food, Beverage & Tobacco Products while the rest contracted.
Jerome Powell, Fed chair, said in an interview that the U.S GDP could contract by 20 to 30% in the second quarter on account of the business shutdowns caused by the coronavirus pandemic. This is concerning for the manufacturing sector as well given that it accounts for 11% of the U.S. economy.
So far this year, the Industrial Products sector has fallen 24.3% compared with the S&P 500’s decline of 10.9%. The coronavirus outbreak has dealt a massive blow to the U.S manufacturing sector, which was already reeling under the protracted U.S.-China trade tensions. The pandemic impacted global manufacturing activities and the supply chain. The companies had to temporarily suspend manufacturing activity at facilities globally, primarily due to low demand or to comply with government mandates to curb the spread.
These challenges associated with COVID-19 will continue to weigh on the sector until the situation stabilizes. The companies in the sector are likely to face end market pressure as capital expenditures in oil & gas, mining and construction are likely to be restrained. Meanwhile, the industry players are focusing on extensive cost cutting and lean manufacturing actions that will help sustain margins despite the volume declines.
Projections for the Sector
Per the latest Earnings Trends report, earnings for the Industrial Products sector is expected to decline 19.4% in first-quarter 2020. In fact, 10 of the 16 Zacks sectors are expected to log decline. Overall for 2020, the sector’s earnings are expected to decline 29.9%. In 2021, the scenario looks promising with the sector’s earnings expected to rise 17.5%.
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Despite the overall weakness in the sector, there are some Industrial Products stocks that hold promise. Our proprietary methodology comes in handy while zeroing in on these stocks. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here. Further, these companies have healthy earnings growth expectations for the current fiscal.
Berry Global Group, Inc. BERY: This Evansville, IN-based Berry Global has a long-term estimated earnings growth rate of 12.5%. It has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for fiscal 2020 earnings has moved up 2% in the past 30 days. The estimate suggests year-over-year growth of 18.8%. The company’s earnings beat estimates in each of the trailing four quarters by 6.6%, on average.
Graphic Packaging Holding Company GPK: Atlanta, GA-based Graphic Packaging has a long-term estimated earnings growth of 25%. It has a VGM Score of B and a Zacks Rank #2. The Zacks Consensus Estimate for 2020 earnings indicates year-over-year improvement of 10%. The estimates have moved up 4% over the past 30 days. The company has a trailing four-quarter positive earnings surprise of 9.6%, on average.
Norsk Hydro ASA NHYDY: Oslo, Norway-based Norsk Hydro has a Zacks Rank #1 and a VGM Score of A. The company has a long-term estimated earnings growth rate of 41.8%. The Zacks Consensus Estimate for 2020 earnings indicates year-over-year growth of 316.7%. The estimates have moved up 400% in the past 30 days.
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