Zacks Industry Outlook Highlights Stanley Black & Decker and Kennametal
For Immediate Release
Chicago, IL – January 4, 2023 – Today, Zacks Equity Research discusses Stanley Black & Decker SWK and Kennametal KMT.
Industry: Manufacturing Tools
Link: https://www.zacks.com/commentary/2034483/should-you-buy-the-dip-in-these-2-manufacturing-tools-stocks-amid-industry-challenges
The Zacks Manufacturing-Tools & Related Products industry is plagued by persistent supply chain disruptions and raw material cost inflation. Investments in product upgrades, though augur well for the industry’s long-term prospects, often weigh on margins and profitability in the near term. The recent slowdown in manufacturing activities, thanks to rising interest rates, implies that the industry is likely to experience lower demand in the near term.
Amid the prevalent headwinds in the industry, Stanley Black & Decker and Kennametal are likely to struggle in the near future.
About the Industry
The Zacks Manufacturing-Tools & Related Products industry comprises companies that develop and distribute hand and mechanics tools, hydraulic tools, engineered fastening systems, and heavy-lifting technology solutions. Arc-welding products, robotic-welding packages, fume-extraction equipment, oxy-fuel cutting equipment, plasma cutters, healthcare solutions, electronic security solutions and other products are also produced by some tool-makers.
The highly advanced tools are used in industrial, commercial, oil & gas, mining, automotive and other industries. The providers of electronic security solutions cater to commercial, retailers, government, financial and healthcare markets. Talking about international operations, some industry players provide products and services to customers in North and South America, Japan, Europe, Canada, Asia and the Middle East.
3 Trends Shaping the Future of the Manufacturing Tools Industry
Weakness in the Manufacturing Sector: Amid the Federal Reserve’s aggressive monetary policy tightening, the recent slowdown in manufacturing activities points to a lower output scenario for the industry participants at least in the near term. Per the Institute for Supply Management’s (ISM) latest report, the manufacturing index touched 49% in November 2022, contracting for the first time since May 2020.
A figure below 50 indicates a contraction in manufacturing activity. With the reduction in new order rates, the index was 1.2 percentage points lower than that recorded in October. Industrial production declined 0.2% in November, with a 0.6% decrease in manufacturing output.
Supply Chain & Cost Woes: Despite the situation improving, supply chain constraints, mainly related to the availability of semiconductor chips, and cost inflation continue to be major headwinds for the industry at least in the first half of 2023. Raw material, freight and logistics cost inflation are hurting the margins and profitability of industry participants. A dearth of skilled workers in the United States has been a perennial problem for the industry participants.
Hefty Investments in Product Development: The industry participants often make significant investments to upgrade products and services to stay competitive in the market. While these bode well for long-term prospects, frequent investments hurt the margins and profitability of these companies. Successive acquisitions to expand product portfolio, boost technological capabilities and extend geographical presence often leave these companies with a highly leveraged balance sheet.
Zacks Industry Rank Suggests Bleak Prospects
The Manufacturing-Tools & Related Products industry is a six-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #236, which places it in the bottom 6% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 resulted from weak earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in the group’s earnings growth potential. The industry’s earnings estimates for 2023 have been revised downward by 51.9% over the past year.
Now, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Manufacturing-Tools & Related Products industry has underperformed both the S&P 500 composite index and the sector in the past year.
Over this period, the industry has declined approximately 45%, compared with the sector and the S&P 500 index’s decrease of 13.9% and 21.2%, respectively.
Industry's Current Valuation
On the basis of forward P/E (F12M), which is a commonly used multiple for valuing manufacturing tools and related product stocks, the industry is currently trading at 14.58X compared with the S&P 500’s 17.68X. It is also below the sector’s P/E (F12M) ratio of 17.64X.
Over the past five years, the industry has traded as high as 22.49X, as low as 10.87X and at the median of 15.62X.
Should You Buy the Dips?
Below we mention two stocks from the industry that are reeling under the effects of supply chain woes and high raw material costs. These stocks carry a Zacks Rank #4 (Sell) or #5 (Strong Sell). So, it’s not wise to buy the dips in these stocks.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Kennametal: Based in Latrobe, PA, Kennametal is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. Weakness in the transportation market due to supply-chain restrictions, mainly related to chip availability, is a major challenge for the company. Escalating raw material costs are denting KMT’s earnings, while foreign currency headwinds are hurting its top line.
The Zacks Consensus Estimate for Kennametal’s fiscal 2023 earnings (ended Jun 30, 2023) has been revised southward by 13.3% in the past 60 days. Shares of this Zacks Rank #4 company have declined 36.4% in the past year.
Stanley Black: Headquartered in New Britain, CT, Stanley Black manufactures and provides tools and related accessories and engineered fastening systems. Weakness in the Tools & Outdoor segment due to reduced retail and consumer demand, thanks to an increase in interest rates, is weighing on the company’s performance. Supply-chain restrictions, primarily semiconductor constraints, and logistics and input cost increases are likely to continue to hurt SWK’s operations.
The Zacks Consensus Estimate for Stanley Black’s 2023 earnings has been revised downward by 18.6% in the past 60 days. Shares of this Zacks Rank #5 company have plunged 60.9% over the past year.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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