For Immediate Release
Chicago, IL – February 21, 2024 – Today, Zacks Equity Research discusses Lincoln Electric Holdings, Inc. LECO, Stanley Black & Decker, Inc. SWK and Enerpac Tool Group Corp. EPAC.
Industry: Manufacturing Tools
Link: https://www.zacks.com/commentary/2228327/3-manufacturing-tools-stocks-to-overcome-industry-headwinds
The Zacks Manufacturing-Tools & Related Products industry is poised to benefit from improving supply chains, resulting in easier availability of raw materials and faster deliveries. Cost-control measures and investments in product development are suitable for the industry’s growth. However, softness in demand due to the slowdown in the manufacturing sector paints a bleak picture for the industry in the near term.
Nevertheless, easing supply chain disruptions are expected to aid companies like Lincoln Electric Holdings, Inc., Stanley Black & Decker, Inc. and Enerpac Tool Group Corp.
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, 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, Canada, Asia and the Middle East.
3 Trends Shaping the Future of the Manufacturing Tools Industry
Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management’s (“ISM”) report, in January, the Manufacturing Purchasing Manager’s Index touched 49.1%, contracting for the 15th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity.
However, the manufacturing sector has been showing signs of gradual improvement, with the new orders index moving into expansion territory. In January, the New Order Index touched 52.5%, registering an increase of 5.5 percentage points from December 2023. The uptick in new orders, in conjunction with the slowdown in inflation, augurs well for the industry participants.
Easing Supply Chain Disruptions: While supply-chain disruptions persist, primarily 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 16th straight month in January. Easing supply chain issues should support companies’ growth in 2024. Additionally, an anticipated reduction in raw material costs should aid the bottom line of the industry participants.
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. 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 Bleak Prospects
The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #223. This rank places it in the bottom 11% 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 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 but Lags S&P 500
The Zacks Manufacturing-Tools & Related Products industry has outperformed the sector but lagged the S&P 500 composite index in the past year.
Over this period, the industry has appreciated 15.4% compared with the sector and the S&P 500 index’s increase of 11% and 22.9%, 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 21.39X compared with the S&P 500’s 20.71X. It is also above the sector’s P/E (F12M) ratio of 17.51X.
Over the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 17.32X.
3 Manufacturing Tool Stocks to Keep a Tab On
Lincoln Electric: Headquartered in Cleveland, OH, Lincoln Electric is a full-line manufacturer and reseller of welding and cutting products. The company has been 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 the Zacks Rank #3 (Hold) company's growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Although the Zacks Consensus Estimate for Lincoln Electric’s 2024 earnings has been revised downward by 1.6% in the past 60 days, the same has recovered 0.2% in the past seven days. The stock has surged 53% in a year.
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. Pricing actions and strength in aerospace and auto markets are expected to fuel SWK’s growth. Cost-reduction efforts are expected to support this Zacks Rank #3 (Hold) company’s margin performance and drive the bottom line. Supply-chain optimization programs and inventory reduction efforts are also expected to boost margins.
The Zacks Consensus Estimate for Stanley Black’s first-quarter 2024 earnings has been revised upward by 13% in the past 60 days. The stock has gained 5.5% in the past year.
Enerpac Tool: Based in Menomonee Falls, WI, Enerpac Tool is a manufacturer, marketer and distributor of various industrial tools, including high-pressure hydraulic tools and controlled force products. Its exposure is notable in the industrial, production automation, mining and energy markets. A solid product line, innovation capabilities, healthy demand and commercial efficiency add to this Zacks Rank #3 (Hold) company’s growth prospects.
The Zacks Consensus Estimate for Enerpac Tool’s fiscal 2024 (ending August 2024) and fiscal 2025 (ending August 2025) earnings has been revised upward by 2.3% and 5.1%, respectively, in the past 60 days. The stock has gained 23.3% in the past year.
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