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U.S. Manufacturing Heading Toward V-Shaped Recovery: 6 Picks

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Nalak Das
·6 min read
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U.S. manufacturing industries are at the forefront of the economy's revival from coronavirus-led unprecedented devastations. U.S. manufacturing showed a V-shaped recovery in the last nine months.

Notably, it was not only the pandemic, which hurt manufacturing activities. This segment had struggled throughout 2019 due to intensification of trade war between the United States and China. Therefore, ongoing recovery of U.S. manufacturing is more commendable.

U.S. Manufacturing Rebounds Impressively

On Mar 1, the Institute for Supply Management (ISM) reported that the U.S. manufacturing Purchasing Managers' Index (PMI) in February hit a 3-year high of 60.8%, exactly the same as the reading of February 2018. The previous highest was 61.4% recorded in May 2004. The consensus estimate for February's PMI was 58.7%.

Notably, any reading above 50% indicates expansion of manufacturing activities while a reading above 55% means exceptional expansion. The ISM PMI has remained above 50 since June 2020. This clearly shows that the pandemic has failed to derail the steady improvement of U.S. manufacturing, which constitutes around 12% of the GDP.

Aside from the PMI, several vital sub-indexes have also improved in February. The New Order Index came in at 64.8%, up 3.7% sequentially. The Production Index stood at 63.2%, up 2.5% sequentially. The Backlog of Orders Index rose 4.3% sequentially to 64%. The Employment Index came in at 54.4%, up 1.8% sequentially. Out of the 18 manufacturing industries, 16 reported growth in February.

Per Timothy R. Fiore, Chairman of the ISM Manufacturing Business Survey Committee, “The manufacturing economy continued its recovery in February. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories. Manufacturing performed well for the ninth straight month, with demand, consumption and inputs registering strong growth compared to January."

Near-Term Drivers

The U.S. government has ramped up nationwide deployment of the COVID-19 vaccines. At the same time, new coronavirus cases reduced significantly in February. The combined effect will be the systematic reopening of the U.S. economy that was operating at a sub-optimal level since lockdowns. This will set in motion cyclical industries such as manufacturing.

On Feb 1, the Congressional Budget Office projected that the economy is expected to reach the pre-pandemic level of February 2020 by mid-2021. On Feb 27, the House of Representatives passed President Joe Biden's proposed $1.9 trillion fresh coronavirus-aid package. If Senate passes this bill, it is likely to significantly boost pent-up demand for U.S. consumers.

As the U.S. and major global economies reopen, the manufacturing sector should strengthen as export demand for high-tech manufacturing products of the country will likely increase. Finally, the Fed has decided to keep the benchmark interest rate as low as 0-0.25% for a longer period than previously expected. A low interest rate will significantly reduce the cost of capital and make U.S. currency cheaper in the foreign exchange market, making the country's products more competitively priced.

Our Top Picks

At this stage, it will be prudent to invest in manufacturing stocks with a favorable Zacks Rank. We have narrowed down our search to six stocks with strong growth potential for 2021 and have witnessed robust earnings estimate revisions in the past seven to 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our six picks year to date.

Deere & Co. DE manufactures and distributes farm equipment worldwide. It operates through three segments: Agriculture and Turf, Construction and Forestry, and Financial Services. This Zacks Rank #1 company has an expected earnings growth rate of 80.3% for the current year (ending October 2021). The Zacks Consensus Estimate for current-year earnings has improved 11% over the past seven days.

Caterpillar Inc. CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide. This Zacks Rank #2 company has an expected earnings growth rate of 21.5% for the current year. The Zacks Consensus Estimate for the current year has improved 0.1% over the past seven days.

Dover Corp. DOV is an industrial conglomerate providing equipment and components, consumable supplies, aftermarket parts, software and digital solutions and support services worldwide. This Zacks Rank #2 company has an expected earnings growth rate of 13.8% for the current year. The Zacks Consensus Estimate for the current year has improved 4% over the past 30 days.

Graco Inc. GGG designs, manufactures, and markets systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials worldwide. This Zacks Rank #2 company has an expected earnings growth rate of 20% for the current year. The Zacks Consensus Estimate for the current year has improved 1.3% over the past 30 days.

Ingersoll Rand Inc. IR provides various mission-critical air, fluid, energy, specialty vehicle and medical technologies in the United States, Europe, the Middle East, Africa, and the Asia Pacific. It operates through four segments: Industrial Technologies and Services, Precision and Science Technologies, Specialty Vehicle Technologies, and High Pressure Solutions segments. This Zacks Rank #2 company has an expected earnings growth rate of 20% for the current year. The Zacks Consensus Estimate for the current year has improved 2.8% over the past seven days.

Illinois Tool Works Inc. ITW manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM, Food Equipment, Test & Measurement and Electronics, Welding; Polymers & Fluids, Construction Products, and Specialty Products. This Zacks Rank #2 company has an expected earnings growth rate of 19.6% for the current year. The Zacks Consensus Estimate for the current year has improved 8.3% over the past 30 days.

Zacks Top 10 Stocks for 2021

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Deere & Company (DE) : Free Stock Analysis Report

Caterpillar Inc. (CAT) : Free Stock Analysis Report

Graco Inc. (GGG) : Free Stock Analysis Report

Illinois Tool Works Inc. (ITW) : Free Stock Analysis Report

Dover Corporation (DOV) : Free Stock Analysis Report

Ingersoll Rand Inc. (IR) : Free Stock Analysis Report

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