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2 Manufacturing Tools Stocks to Watch Amid Industry Woes
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Improving supply chains act as a key growth driver for the Zacks Manufacturing-Tools & Related Products industry. Investments in product development and focus on expanding operations through strategic acquisitions are expected to fuel the industry’s growth. However, softness in demand due to slowdown in the manufacturing sector paints a bleak picture for the industry in the near term.
Nevertheless, improving supply chains are expected to aid Stanley Black & Decker (SWK - Free Report) and Lincoln Electric (LECO - Free Report) .
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
Persistent Weakness in the Manufacturing Sector: Continued weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management (ISM) report, in October, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.7%, contracting for the 12th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index has remained in contraction territory for the past several quarters, registering 45.5% in August. The weakness in the manufacturing sector can be attributed to the slowdown in the economy. Given the weakness in the manufacturing sector, industrial demand is likely to remain suppressed.
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 13th straight month in October. Easing supply chain issues should support industrial manufacturing companies’ growth in 2023 and beyond.
Investments in Product Development & Innovation: The industry participants’ constant focus on innovation, product upgrades and the development of new products to stay competitive in the market should drive growth. Focus on expanding product offerings, geographical reach and customer base through strategic acquisitions should continue to drive revenues of these companies.
Zacks Industry Rank Suggests Bleak Prospects
The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #199. This rank places it in the bottom 21% 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 and 2024 have been revised downward by 72.1% and 38.5% over the past year, respectively.
Despite the bleak near-term prospects, we will present a few stocks that you may want to retain in your portfolios. But it is worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Manufacturing-Tools & Related Products industry has outperformed both the S&P 500 composite index and the sector in the past year.
Over this period, the industry has appreciated 18.3%, compared with the sector and the S&P 500 index’s increase of 3.5% and 14.9%, respectively.
One-Year Price Performance
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 19.84X compared with the S&P 500’s 19.09X. It is also above the sector’s P/E (F12M) ratio of 15.70X.
Over the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 16.95X, as the chart below shows:
Stanley Black: Headquartered in New Britain, CT, Stanley Black manufactures tools (power and hand tools) and related accessories and engineered fastening systems, among other items. SWK’s global cost-reduction program is expected to drive its bottom line. The company expects to generate run rate savings of $1 billion from this program in 2023. By 2025, it envisions run rate savings of $2 billion. Supply-chain optimization program and inventory reduction efforts are also expected to boost margins. SWK expects to achieve adjusted gross margins of more than 35% by 2025.
The Zacks Consensus Estimate for Stanley Black’s 2023 earnings has been revised upward by 20% in the past 60 days. The stock has gained 11.5% in a year.
Price and Consensus: SWK
Lincoln Electric: Headquartered in Cleveland, OH, Lincoln Electric is a full-line manufacturer and reseller of welding and cutting products. Improving orders, strong quoting activity and record backlogs augur well for the company. Product launches in the automation solutions market and investments in new technologies, like additives, are expected to bolster LECO’s growth.
The Zacks Consensus Estimate for Lincoln Electric’s 2023 earnings has been revised upward by nearly 1% in the past 60 days. The stock has surged 30.4% in a year.
Price and Consensus: LECO
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2 Manufacturing Tools Stocks to Watch Amid Industry Woes
Improving supply chains act as a key growth driver for the Zacks Manufacturing-Tools & Related Products industry. Investments in product development and focus on expanding operations through strategic acquisitions are expected to fuel the industry’s growth. However, softness in demand due to slowdown in the manufacturing sector paints a bleak picture for the industry in the near term.
Nevertheless, improving supply chains are expected to aid Stanley Black & Decker (SWK - Free Report) and Lincoln Electric (LECO - Free Report) .
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
Persistent Weakness in the Manufacturing Sector: Continued weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management (ISM) report, in October, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.7%, contracting for the 12th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index has remained in contraction territory for the past several quarters, registering 45.5% in August. The weakness in the manufacturing sector can be attributed to the slowdown in the economy. Given the weakness in the manufacturing sector, industrial demand is likely to remain suppressed.
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 13th straight month in October. Easing supply chain issues should support industrial manufacturing companies’ growth in 2023 and beyond.
Investments in Product Development & Innovation: The industry participants’ constant focus on innovation, product upgrades and the development of new products to stay competitive in the market should drive growth. Focus on expanding product offerings, geographical reach and customer base through strategic acquisitions should continue to drive revenues of these companies.
Zacks Industry Rank Suggests Bleak Prospects
The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #199. This rank places it in the bottom 21% 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 and 2024 have been revised downward by 72.1% and 38.5% over the past year, respectively.
Despite the bleak near-term prospects, we will present a few stocks that you may want to retain in your portfolios. But it is worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Manufacturing-Tools & Related Products industry has outperformed both the S&P 500 composite index and the sector in the past year.
Over this period, the industry has appreciated 18.3%, compared with the sector and the S&P 500 index’s increase of 3.5% and 14.9%, respectively.
One-Year Price Performance
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 19.84X compared with the S&P 500’s 19.09X. It is also above the sector’s P/E (F12M) ratio of 15.70X.
Over the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 16.95X, as the chart below shows:
Price-to-Earnings Ratio
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Price-to-Earnings Ratio
2 Manufacturing Tool Stocks to Keep a Tab on
Each of the stocks mentioned below carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stanley Black: Headquartered in New Britain, CT, Stanley Black manufactures tools (power and hand tools) and related accessories and engineered fastening systems, among other items. SWK’s global cost-reduction program is expected to drive its bottom line. The company expects to generate run rate savings of $1 billion from this program in 2023. By 2025, it envisions run rate savings of $2 billion. Supply-chain optimization program and inventory reduction efforts are also expected to boost margins. SWK expects to achieve adjusted gross margins of more than 35% by 2025.
The Zacks Consensus Estimate for Stanley Black’s 2023 earnings has been revised upward by 20% in the past 60 days. The stock has gained 11.5% in a year.
Price and Consensus: SWK
Lincoln Electric: Headquartered in Cleveland, OH, Lincoln Electric is a full-line manufacturer and reseller of welding and cutting products. Improving orders, strong quoting activity and record backlogs augur well for the company. Product launches in the automation solutions market and investments in new technologies, like additives, are expected to bolster LECO’s growth.
The Zacks Consensus Estimate for Lincoln Electric’s 2023 earnings has been revised upward by nearly 1% in the past 60 days. The stock has surged 30.4% in a year.
Price and Consensus: LECO