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3 Top Stocks From the Buoyant Diversified Operations Industry
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Persistent weakness in the manufacturing sector and reduced consumer spending have been taking a toll on the Zacks Diversified Operations industry. However, the industry is poised to gain from easing supply chain disruptions and reduced lead times. Cost-control measures augur well for the bottom line of these companies.
Companies like Honeywell International (HON - Free Report) , Griffon Corporation (GFF - Free Report) and Vector Group Ltd. are well-placed to capitalize on the benefits of improvement in supply chains.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end markets, including oil & gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines and engineered fluid-process equipment. The industry players also provide related services to a large customer base. In addition, a few companies offer services in the agriculture, marine and telecommunications markets and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and other countries.
3 Trends Shaping the Future of the Diversified Operations Industry
Persistent Weakness in the Manufacturing Sector: Continued weakness in the manufacturing sector signals a low-demand environment for the industry players. Per the Institute for Supply Management (ISM) report, in May, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.9%, contracting for the seventh consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index remained in contraction territory at 42.6%, declining 3.1 percentage points from the figure recorded in April. As recession fears loom large amid a slowdown in the U.S. economy, businesses expect continued softness in demand, at least in the near term.
Inflationary Pressure: Companies with exposure to the electronics, healthcare and consumer verticals are experiencing lower demand due to reduced consumer spending as a result of inflationary pressure. Within the electronics division, there is softness, particularly for smartphones, tablets and TVs. Within the consumer segment, companies are witnessing a decline in home improvement, home health and auto care businesses. Given the high inflation levels, consumer spending is likely to remain suppressed through 2023, weighing on the top line of these companies. Reduced demand in the residential end market is also a concern for the industry.
Easing Supply Chain Disruptions: While supply chain disruptions persist, especially related to the availability of electronic components, the situation has improved, as evident from the ISM report’s Supplier Deliveries Index, which reflected faster deliveries for the eighth straight month in May. Easing supply chain issues should support manufacturing tools companies’ growth in 2023. Cost-control measures boost the margins of the industry participants despite raw material cost inflation.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #112. This rank places it in the top 45% 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.
Given the solid near-term prospects, we will present a few stocks that you may want to add to your portfolio. But it is worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Lags S&P 500
Over the past year, the Zacks Diversified Operations has underperformed the Zacks S&P 500 composite index. The industry has gained 4.3% compared with the S&P 500 Index’s 14.7% increase.
One-Year Price Performance
Industry's Current Valuation
On the basis of EV/EBITDA (TTM), which is a commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 14.29X compared with the S&P 500’s 13.31.
Over the past five years, the industry has traded as high as 24.72X, as low as 5.87X and at the median of 10.60X, as the chart below shows:
EV/EBITDA Ratio (TTM) Versus S&P 500
3 Diversified Operations Stocks to Buy
Griffon: Strong commercial volumes and an anticipated increase in residential volumes within the Home and Building Products segment are expected to drive Griffon’s growth in 2023. Cost-management efforts are expected to support this Zacks Rank #1 (Strong Buy) company’s bottom line. You can see the complete list of today’s Zacks #1 Rank stocks here.
A diversified holding company, Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. The Zacks Consensus Estimate for GFF’s 2023 earnings has been revised upward by 12.5% in the past 60 days. The stock has surged approximately 41% in a year.
Price and Consensus: GFF
Honeywell: Strength in the cyber, industrial, aerospace and connected building end markets, solid operational execution and improving supply chains augur well for Honeywell’s growth. Pricing actions and cost-control measures support this Zacks Rank #2 (Buy) company’s margins.
Based in Morris Township, NJ, Honeywell is a global diversified technology and manufacturing company with a wide range of aerospace products and services. The Zacks Consensus Estimate for HON’s 2023 earnings has been revised upward by nearly 1% in the past 60 days. The stock has gained around 18% in a year.
Price and Consensus: HON
Vector Group: Higher tobacco sales and the transition of the Montego brand strategy from volume-based to income-based are driving the Vector Group’s growth. The company carries a Zacks Rank #2.
A diversified holding company, Vector Group operates through its subsidiaries, Liggett Group LLC and Vector Tobacco Inc., manufacturing cigarette products for adult smokers. The Zacks Consensus Estimate for VGR’s 2023 earnings has been revised upward by 3.5% in the past 60 days. The stock has rallied 21.4% in a year.
Price and Consensus: VGR
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3 Top Stocks From the Buoyant Diversified Operations Industry
Persistent weakness in the manufacturing sector and reduced consumer spending have been taking a toll on the Zacks Diversified Operations industry. However, the industry is poised to gain from easing supply chain disruptions and reduced lead times. Cost-control measures augur well for the bottom line of these companies.
Companies like Honeywell International (HON - Free Report) , Griffon Corporation (GFF - Free Report) and Vector Group Ltd. are well-placed to capitalize on the benefits of improvement in supply chains.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end markets, including oil & gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines and engineered fluid-process equipment. The industry players also provide related services to a large customer base. In addition, a few companies offer services in the agriculture, marine and telecommunications markets and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and other countries.
3 Trends Shaping the Future of the Diversified Operations Industry
Persistent Weakness in the Manufacturing Sector: Continued weakness in the manufacturing sector signals a low-demand environment for the industry players. Per the Institute for Supply Management (ISM) report, in May, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.9%, contracting for the seventh consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index remained in contraction territory at 42.6%, declining 3.1 percentage points from the figure recorded in April. As recession fears loom large amid a slowdown in the U.S. economy, businesses expect continued softness in demand, at least in the near term.
Inflationary Pressure: Companies with exposure to the electronics, healthcare and consumer verticals are experiencing lower demand due to reduced consumer spending as a result of inflationary pressure. Within the electronics division, there is softness, particularly for smartphones, tablets and TVs. Within the consumer segment, companies are witnessing a decline in home improvement, home health and auto care businesses. Given the high inflation levels, consumer spending is likely to remain suppressed through 2023, weighing on the top line of these companies. Reduced demand in the residential end market is also a concern for the industry.
Easing Supply Chain Disruptions: While supply chain disruptions persist, especially related to the availability of electronic components, the situation has improved, as evident from the ISM report’s Supplier Deliveries Index, which reflected faster deliveries for the eighth straight month in May. Easing supply chain issues should support manufacturing tools companies’ growth in 2023. Cost-control measures boost the margins of the industry participants despite raw material cost inflation.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #112. This rank places it in the top 45% 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.
Given the solid near-term prospects, we will present a few stocks that you may want to add to your portfolio. But it is worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Lags S&P 500
Over the past year, the Zacks Diversified Operations has underperformed the Zacks S&P 500 composite index. The industry has gained 4.3% compared with the S&P 500 Index’s 14.7% increase.
One-Year Price Performance
Industry's Current Valuation
On the basis of EV/EBITDA (TTM), which is a commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 14.29X compared with the S&P 500’s 13.31.
Over the past five years, the industry has traded as high as 24.72X, as low as 5.87X and at the median of 10.60X, as the chart below shows:
EV/EBITDA Ratio (TTM) Versus S&P 500
3 Diversified Operations Stocks to Buy
Griffon: Strong commercial volumes and an anticipated increase in residential volumes within the Home and Building Products segment are expected to drive Griffon’s growth in 2023. Cost-management efforts are expected to support this Zacks Rank #1 (Strong Buy) company’s bottom line. You can see the complete list of today’s Zacks #1 Rank stocks here.
A diversified holding company, Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. The Zacks Consensus Estimate for GFF’s 2023 earnings has been revised upward by 12.5% in the past 60 days. The stock has surged approximately 41% in a year.
Price and Consensus: GFF
Honeywell: Strength in the cyber, industrial, aerospace and connected building end markets, solid operational execution and improving supply chains augur well for Honeywell’s growth. Pricing actions and cost-control measures support this Zacks Rank #2 (Buy) company’s margins.
Based in Morris Township, NJ, Honeywell is a global diversified technology and manufacturing company with a wide range of aerospace products and services. The Zacks Consensus Estimate for HON’s 2023 earnings has been revised upward by nearly 1% in the past 60 days. The stock has gained around 18% in a year.
Price and Consensus: HON
Vector Group: Higher tobacco sales and the transition of the Montego brand strategy from volume-based to income-based are driving the Vector Group’s growth. The company carries a Zacks Rank #2.
A diversified holding company, Vector Group operates through its subsidiaries, Liggett Group LLC and Vector Tobacco Inc., manufacturing cigarette products for adult smokers. The Zacks Consensus Estimate for VGR’s 2023 earnings has been revised upward by 3.5% in the past 60 days. The stock has rallied 21.4% in a year.
Price and Consensus: VGR