The Zacks Diversified Operations is well-positioned to benefit from solid momentum in the aerospace, defense, and oil & gas industries. Growth in commercial aviation and steady demand in the medical and life science markets are key drivers for industry participants. Infrastructure development, innovation, and technological advancements are also providing momentum.
However, Weakness in the manufacturing sector and supply-chain issues have been weighing on the performance of some industry players. Honeywell International Inc. HON, 3M Company MMM, Carlisle Companies Incorporated CSL and Griffon Corporation GFF are a few industry participants that are likely to capitalize on these opportunities.
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. Industry players also provide related services to a large customer base. 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.
Major Trends Shaping the Future of the Diversified Operations Industry
Strength in Aerospace and Defense Markets: The outlook of multi-sector companies mainly depends on the operating conditions of end markets. Some factors that currently favor the industry are healthy demand from the aerospace, defense and governmental sectors, along with stability in the oil and gas market and infrastructure development. Industry players with exposure in the commercial aviation markets are poised to gain from healthy growth in air transport flight hours. Also, solid demand for several products and equipment in the medical and life science markets bodes well for some industry participants.
Investments in Innovation & Technological Advancements: The industry participants’ constant focus on innovation, product upgrades and the development of new products to stay competitive in the market should drive growth. With the gradual development of business models and cutting-edge technologies, several industry players have been banking on digitizing their business operations for a while now. Digitization enables industry participants to boost their competitiveness through enhanced operational productivity, product quality and better cost management.
Weakness in the Manufacturing Sector: Weakness in the manufacturing sector has been denting demand in the industry. After witnessing expansion in economic activities for the second consecutive month in February, the manufacturing sector contracted in March. Per the Institute for Supply Management’s (ISM) report, in March, the Manufacturing Purchasing Manager’s Index touched 49%, down from 50.3% recorded in February. A figure less than 50% indicates a contraction in manufacturing activity. Also, the New Orders Index contracted for the second consecutive month, registering 45.2% in March and 48.6% in February.
Supply-Chain Disruptions: Supply-chain disruptions, especially related to the availability of electrical and electronic components, have been concerning for the industry participants of late. The latest ISM report’s Supplier Deliveries Index reflects slower deliveries for the fourth straight month in March. Supply-chain issues, if not controlled, might hinder the growth of diversified operation companies, going forward.
Zacks Industry Rank Suggests Strong Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #85. This rank places it in the top 35% of 246 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates robust prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
Given the bullish near-term prospects of the industry, we will present few stocks that you may want to consider for your portfolio. However, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags the S&P 500
In the past year, the Zacks Diversified Operations industry has underperformed the S&P 500 composite. The industry has increased 3.3% compared with the S&P 500 Index’s 5.5% growth.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward P/E (F12M), which is a commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 15.51X compared with the S&P 500’s 20.37X.
Over the past five years, the industry has traded as high as 23.31X and as low as 13.81X, with a median of 16.76X, as the chart below shows:
Price-to-Earnings Ratio Versus S&P 500
4 Diversified Operations Leading the Pack
Griffon: The New York-based company engages in the manufacture and sale of a wide range of consumer and professional, and home and building products, including garage doors, shutters and disposable health care products. GFF is gaining from the increased demand for residential products, supported by the resiliency of repair and remodeling activity in the residential construction market. Its investment in productivity, innovation and capacity expansion is expected to drive performance in the quarters ahead.
Shares of this Zacks Rank #1 company have gained 4.4% in the past six months. It delivered an earnings surprise of 14.7%, on average, beating estimates in three of the last four quarters while missing the mark in one. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: GFF
3M: Based in St. Paul, MN, 3M operates as a diversified technology firm. It has manufacturing operations across the globe and serves a diversified customer base throughout the world. The company stands to gain from strong momentum in the Safety and Industrial segment, driven by strength in the roofing granules and electrical markets. Increase in commercial branding & strength in the transportation and electronics markets are aiding its Transportation and Electronics segment.
Shares of this Zacks Rank #3 (Hold) company have soared 51.2% in the past year. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 8.7%.
Price and Consensus: MMM
Honeywell: Based in Charlotte, NC, Honeywell is a global diversified technology and manufacturing company, with a wide range of products and services. Its diversified portfolio includes aerospace products and services, energy-efficient products and solutions for businesses and process technology. HON is gaining from strength in its commercial aviation aftermarket business driven by solid demand in the air transport and business aviation markets. Strong demand in commercial aviation, growth in air transport flight hours, higher shipset deliveries and strong defense spend volumes also bode well for it.
Shares of the Zacks Rank #3 company rose 3.7% in the past year. The company delivered better-than-expected results in each of the trailing four quarters, the average surprise being 4.1%.
Price and Consensus: HON
Carlisle: Based in Scottsdale, AZ, Carlisle engages in the design, manufacture and sale of a wide range of roofing and waterproofing products, engineered products and finishing equipment. CSL is gaining from inventory normalization and growing re-roof activity in the construction sector. Strength in the Carlisle Construction Materials segment, driven by contributions from the MTL acquisition and healthy end-market demand, bodes well for it.
The Zacks Rank #3 company has delivered better-than-expected results in three of the trailing four quarters, while missing the mark in one, the average surprise being 2.3%. Estimates for CSL’s second-quarter 2025 earnings have improved 0.3% in the past 60 days.
Price and Consensus: CSL
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