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2 Manufacturing Tools Stocks to Watch Despite Industry Headwinds
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Weakness in the manufacturing sector, slowdown in new orders and lingering effects of supply chain issues have marred the outlook of the Zacks Manufacturing-Tools & Related Products industry. The shortage of skilled labor in the United States is another concern for the industry.
However, industry participants’ focus on cost-control measures and investments in product development have been allowing them to stay competitive in the market. Stanley Black & Decker, Inc. (SWK - Free Report) and Lincoln Electric Holdings, Inc. (LECO - Free Report) appear well-poised to stay afloat in challenging market conditions.
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 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, retail, 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, Asia and the Middle East.
Major Trends Shaping Manufacturing Tools Industry's Prospects
Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been denting demand in the industry. Per the Institute for Supply Management’s (ISM) report, in July, the Manufacturing Purchasing Manager’s Index touched 46.8%, down from 48.5% recorded in June. A figure less than 50% indicates a contraction in manufacturing activity. After breaking a sixteenth-month of contraction streak by growing in March, the manufacturing sector contracted for the fourth consecutive month in July. Also, the New Orders Index remained in the contraction territory for the fourth consecutive month, registering 47.4% in July. The past four months registered a slowdown in orders compared with the beginning of the year, with weaker-than-expected readings on manufacturing and consumer spending.
Rising Costs Hurt Margins: Industry participants have been encountering input cost inflation and other expenses, which have been denting profitability. Also, supply-chain issues have increased warehouse, packaging and other logistics expenses. The rise in expenses, along with a tough labor market, poses a threat to margins. That said, companies have been focused on cost management initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and implementing effective pricing policies.
Investments in Product Development & Innovation: Constant focus on innovation by industry players, product upgrades and the development of new products to stay competitive in the market will likely drive growth. While this augurs well for the industry’s long-term growth, hefty investments in research and development often leave companies with highly-leveraged balance sheets.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #220. This rank places it in the bottom 12% 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.
Despite bleak near-term prospects, we will present a couple of 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 Lags Both Sector & S&P 500
The Zacks Manufacturing-Tools & Related Products industry has underperformed the sector and the S&P 500 composite index in the past year.
Over this period, the industry has appreciated 7.6% compared with the sector and the S&P 500 index’s increase of 14.5% and 23%, 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 20.52X compared with the S&P 500’s 21.49X. It is trading above the sector’s P/E (F12M) ratio of 19.00X.
In the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 18.56X, as the chart below shows:
Price-to-Earnings Ratio
Price-to-Earnings Ratio
2 Manufacturing Tool Stocks to Keep a Tab on
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. Strength in the aerospace market and pricing actions are expected to fuel SWK’s growth. Cost-reduction efforts and supply-chain optimization programs are also expected to support this Zacks Rank #3 (Hold) company’s margin in the quarters ahead. You can see the complete list of today’s Zacks #1 Rank stocks here.
Stanley Black reported better-than-expected results in each of the last four quarters, the earnings surprise being 20.3%, on average. The Zacks Consensus Estimate for Stanley Black’s third-quarter 2024 earnings has been revised upward by 7.1% in the past 60 days. The stock has gained 2.4% in the past 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. The company is witnessing improving orders, strong quoting activity and high backlogs for equipment systems and automation solutions. Product launches in the automation solutions market and investments in new technologies, like additives, are expected to bolster LECO’s growth.
This Zacks Rank #3 company reported better-than-expected results in each of the last four quarters, the earnings surprise being 5.8%, on average. In the past 60 days, Lincoln Electric’s earnings estimates have been revised downward by 5.1% for third-quarter 2024. The stock has increased 2% in a year.
Price and Consensus: LECO
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2 Manufacturing Tools Stocks to Watch Despite Industry Headwinds
Weakness in the manufacturing sector, slowdown in new orders and lingering effects of supply chain issues have marred the outlook of the Zacks Manufacturing-Tools & Related Products industry. The shortage of skilled labor in the United States is another concern for the industry.
However, industry participants’ focus on cost-control measures and investments in product development have been allowing them to stay competitive in the market. Stanley Black & Decker, Inc. (SWK - Free Report) and Lincoln Electric Holdings, Inc. (LECO - Free Report) appear well-poised to stay afloat in challenging market conditions.
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 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, retail, 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, Asia and the Middle East.
Major Trends Shaping Manufacturing Tools Industry's Prospects
Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been denting demand in the industry. Per the Institute for Supply Management’s (ISM) report, in July, the Manufacturing Purchasing Manager’s Index touched 46.8%, down from 48.5% recorded in June. A figure less than 50% indicates a contraction in manufacturing activity. After breaking a sixteenth-month of contraction streak by growing in March, the manufacturing sector contracted for the fourth consecutive month in July. Also, the New Orders Index remained in the contraction territory for the fourth consecutive month, registering 47.4% in July. The past four months registered a slowdown in orders compared with the beginning of the year, with weaker-than-expected readings on manufacturing and consumer spending.
Rising Costs Hurt Margins: Industry participants have been encountering input cost inflation and other expenses, which have been denting profitability. Also, supply-chain issues have increased warehouse, packaging and other logistics expenses. The rise in expenses, along with a tough labor market, poses a threat to margins. That said, companies have been focused on cost management initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and implementing effective pricing policies.
Investments in Product Development & Innovation: Constant focus on innovation by industry players, product upgrades and the development of new products to stay competitive in the market will likely drive growth. While this augurs well for the industry’s long-term growth, hefty investments in research and development often leave companies with highly-leveraged balance sheets.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #220. This rank places it in the bottom 12% 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.
Despite bleak near-term prospects, we will present a couple of 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 Lags Both Sector & S&P 500
The Zacks Manufacturing-Tools & Related Products industry has underperformed the sector and the S&P 500 composite index in the past year.
Over this period, the industry has appreciated 7.6% compared with the sector and the S&P 500 index’s increase of 14.5% and 23%, 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 20.52X compared with the S&P 500’s 21.49X. It is trading above the sector’s P/E (F12M) ratio of 19.00X.
In the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 18.56X, as the chart below shows:
Price-to-Earnings Ratio
Price-to-Earnings Ratio
2 Manufacturing Tool Stocks to Keep a Tab on
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. Strength in the aerospace market and pricing actions are expected to fuel SWK’s growth. Cost-reduction efforts and supply-chain optimization programs are also expected to support this Zacks Rank #3 (Hold) company’s margin in the quarters ahead. You can see the complete list of today’s Zacks #1 Rank stocks here.
Stanley Black reported better-than-expected results in each of the last four quarters, the earnings surprise being 20.3%, on average. The Zacks Consensus Estimate for Stanley Black’s third-quarter 2024 earnings has been revised upward by 7.1% in the past 60 days. The stock has gained 2.4% in the past 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. The company is witnessing improving orders, strong quoting activity and high backlogs for equipment systems and automation solutions. Product launches in the automation solutions market and investments in new technologies, like additives, are expected to bolster LECO’s growth.
This Zacks Rank #3 company reported better-than-expected results in each of the last four quarters, the earnings surprise being 5.8%, on average. In the past 60 days, Lincoln Electric’s earnings estimates have been revised downward by 5.1% for third-quarter 2024. The stock has increased 2% in a year.
Price and Consensus: LECO