The Zacks Manufacturing-Tools & Related Products industry has been grappling with persistent weakness in the manufacturing sector, declines in new orders and supply-chain disruptions. The shortage of skilled labor in the United States creates concerns for the industry.
However, industry players' emphasis on cost-control initiatives and investments in product development have been enabling them to be competitive in the market. Stanley Black & Decker, Inc. SWK and Techtronic Industries Company Limited TTNDY appear well-poised to stay afloat in challenging market conditions.
About the Industry
The Zacks Manufacturing-Tools and 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 and gas, mining, automotive and other industries. The providers of electronic security solutions cater to commercial, retail, government, financial and healthcare markets. Regarding international operations, some industry players provide products and services to customers in North and South America, Japan, Europe, Canada, 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 industry demand. After breaking a sixteen-month contraction streak by growing in March, the manufacturing sector contracted for the sixth consecutive month in September. Per the Institute for Supply Management’s (ISM) report, in September, the Manufacturing Purchasing Manager’s Index touched 47.2%, matching the figure recorded in August. A figure less than 50% indicates a contraction in manufacturing activity. Also, the New Orders Index remained in the contraction territory for six consecutive months, registering 46.1% in September. The third quarter of 2024 recorded a slowdown in orders, with weaker-than-expected readings in the manufacturing sector.
Supply-Chain Disruptions: Supply-chain disruptions, especially related to the availability of electronic components, have been concerning for the industry participants of late. This is evident from the latest ISM report’s Supplier Deliveries Index, which reflected slower deliveries in September. Supply-chain issues, if not controlled, might continue to raise warehouse, packaging and other logistics expenses.
Rising Costs Hurt Margins: Industry participants have been encountering input cost inflation and other expenses, denting profitability. A few industry participants have been incurring higher restructuring expenses and headcount-related costs. 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 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 #246. This rank places it in the bottom 2% 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 is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. The industry’s earnings estimates for 2024 have decreased 23.5% over the past year.
Despite bleak near-term prospects, we will present a couple of stocks that you may want to retain in your portfolios. However, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Lags 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 4% compared with the sector and the S&P 500 index’s growth of 31.4% and 40.2%, 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 19.29X compared with the S&P 500’s 22.01X. It is also below the sector’s P/E (F12M) ratio of 20.29X.
In the past five years, the industry has traded as high as 25.05X, as low as 10.98X and at the median of 18.58X, as the chart below shows:
Price-to-Earnings Ratio vs SP500
Price-to-Earnings Ratio vs Sector
2 Manufacturing Tool Stocks to Keep a Tab on
Stanley Black: Headquartered in New Britain, CT, the company manufactures tools (power and hand tools) and related accessories and engineered fastening systems, among other items. It is benefiting from the global cost-reduction program, which is expected to aid Its bottom line and drive margins. The company expects to generate run rate savings of $1.5 billion from this program in 2024 and $2 billion in 2025. SWK’s commitment to rewarding shareholders through dividend payments adds to its appeal.
Stanley Black reported better-than-expected results in the last four quarters, the earnings surprise being 20.3%, on average. The Zacks Consensus Estimate for the company’s 2024 earnings has been unchanged in the past 60 days. SWK has an estimated earnings growth rate of 188.2% for the current year. The Zacks Rank #3 (Hold) stock has gained 33.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SWK
Techtronic Industries: Headquartered in Hong Kong, the company specializes in designing, manufacturing and marketing power tools, outdoor power equipment, and floorcare and cleaning products, serving markets in North America, Europe, and internationally. Techtronic Industries is benefiting from strength across the TTI Power Equipment segment, driven by solid growth in the MILWAUKEE business. Solid momentum in the floorcare and cleaning business is also expected to bolster TTNDY’s growth.
In the past 60 days, This Zacks Rank #3 company’s earnings estimates have been unchanged for 2024. TTNDY has an estimated earnings growth rate of 15.8% for the current year. The stock has gained 61.6% in a year.
Price and Consensus: TTNDY
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