U.S. manufacturing industry, which faced severe challenges in 2019 owing to the lingering trade conflict and tariff war with China, is showing signs of recovery. Moreover, 2020 should bring good tidings as the two countries signed a phase-one trade deal on Jan 15 to resolve the tariff war.
U.S. Manufacturing Showing Signs of Improvement
On Feb 3, the Institute of Supply Management (ISM) reported that the U.S. manufacturing activities index for the month of January came in at 50.9, its highest since July 2019. Notably, the metric showed that manufacturing activities expanded in January after five consecutive months of contraction. Any reading above 50 means expansion of U.S. manufacturing activities.
January’s data also surpassed the consensus estimate of 48.6. Moreover, December’s reading was revised upward to 47.8 from 47.2 reported earlier. The manufacturing industry accounts for around 12% of the U.S. GDP.
Most importantly, the new orders sub index of the ISM manufacturing index surged to 52 in January from a revised 47.6 in the previous month. This sub index is very important since it provides some clue to future expectations of manufacturing output.
U.S., China Sign Phase-One Trade Deal
On Jan 15, the United States and China signed a temporary trade deal popularly known as the phase-one trade deal. China has committed to buy $40 billion to $50 billion U.S. agricultural products annually and a total of $200 billion of U.S. goods over two years. The Trump administration may rollback some tariffs already imposed on China.
The deal has the provision to address intellectual-property disputes and force technology transfer along with strong enforcement provisions in financial services and currency issues in addition to tariff rollback and higher agricultural purchase. The U.S. government has decided to delete China from its list of currency manipulators.
U.S. Manufacturing to Benefit
The recently signed phase-one trade deal between the United States and China has significantly cooled down the nearly two-year-old tariff war. The interim deal will at least help in restoring U.S. business confidence and global economic growth.
China is the largest trading partner of the United States. A strong economy in China, the largest market for high-tech products, will give U.S. manufacturers a solid boost. Moreover, China plays the role of a low-cost supplier of intermediary products and other inputs to high-tech U.S. industries.
An end to the U.S.-China trade spat is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. manufacturing products. Likewise, the repeal of tariffs on Chinese intermediary goods should raise the profit margin of U.S. tech giants. Moreover, clinching an agreement with China, which will strictly protect U.S. intellectual properties, will be immensely beneficial for home-grown manufacturers.
Our Top Picks
At this stage, we have narrowed down our search to five manufacturing stocks that popped in the past year and still have momentum for the current year. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past year.
Agilysys Inc. AGYS operates as a developer and marketer of hardware and software products and services to the hospitality industry in North America, Europe, the Asia-Pacific and India. The company has an expected earnings growth rate of 36.8% for the current year (ending March 2020). The Zacks Consensus Estimate for the current year has improved 14.3% over the past 30 days. The stock has rallied 75.1% in the past year.
Masonite International Corp. DOOR designs, manufactures, and distributes interior and exterior doors for the new construction and repair, renovation and remodeling sectors of the residential and non-residential building construction markets worldwide. The company has an expected earnings growth rate of 27.9% for the current year. The Zacks Consensus Estimate for the current year improved 0.9% over the past 30 days. The stock has jumped 38.5% in the past year.
SPX FLOW Inc. FLOW provides various engineered solutions worldwide. It operates in three segments: Food and Beverage, Power and Energy and Industrial. The company has an expected earnings growth rate of 9.2% for the current year. The Zacks Consensus Estimate for the current year improved 0.5% over the past 30 days. The stock has climbed 37.9% in the past year.
Graco Inc. GGG designs, manufactures, and markets systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials worldwide. The company has an expected earnings growth rate of 4.2% for the current year. The Zacks Consensus Estimate for the current year improved 5.9% over the past 30 days. The stock has soared 23% in the past year.
The Simply Good Foods Co. SMPL develops, markets and sells branded nutritional foods and snack products in North America and internationally. It markets nutrition bars, ready-to-drink shakes, snacks, and confectionery products under the Atkins, SimplyProtein, and Atkins Endulge brand names. The company has an expected earnings growth rate of 64.3% for the current year (ending August 2020). The Zacks Consensus Estimate for the current year improved 17.9% over the past 30 days. The stock has surged 18.5% in the past year.
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