The Zacks Diversified Operations industry has been grappling with persistent weakness in the manufacturing sector. Industry participants have also been facing concerns due to the ongoing impact of supply-chain issues, particularly regarding the availability of electronic components.
The industry is benefiting from the strength across aerospace, defense and oil & gas industries. Growth in the commercial aviation sector and solid demand across medical and life science end markets have been allowing the industry participants to stay competitive in the market. 3M Company MMM, Carlisle Companies Incorporated CSL, Griffon Corporation GFF and LSB Industries, Inc. LXU are likely to capitalize on the 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
Weakness in the Manufacturing Sector: Persistent softness in the manufacturing sector has been denting demand in the industry. After breaking a 16-month contraction streak by growing in March 2024, the manufacturing sector contracted for the ninth consecutive month in December 2024. Per the Institute for Supply Management’s (ISM) report, the Manufacturing Purchasing Manager’s Index touched 49.3% in December. A figure less than 50% indicates a contraction in manufacturing activity. Although the Production Index expanded in December, touching 50.3%, the metric remained in contraction territory for the previous six consecutive months.
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. This is evident from the latest ISM report’s Supplier Deliveries Index, which reflected slower deliveries in December 2024. Supply-chain issues, if not controlled, might hinder the growth of diversified operation companies, going forward.
Strength in Aerospace and Defense Markets: The prospects of multi-sector companies are closely linked to the operating conditions of end markets. Some factors that currently favor the industry are healthy demand from the defense and governmental sectors, higher exploration activities in the oil and gas industry 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, strong demand for several products and equipment in the medical and life science markets bode 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.
Zacks Industry Rank Suggests Bleak Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #179. This rank places it in the bottom 28% 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. 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of weak earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are keeping less faith in this group's earnings growth potential. The industry’s earnings estimates for the current year have moved down 5.6% in the past year.
We will present a few stocks that you may want to retain in your portfolio. 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 Zacks S&P 500 composite. The industry has increased 0.6% compared with the S&P 500 Index’s 26.2% 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 15.44X compared with the S&P 500’s 22.42X.
Over the past five years, the industry has traded as high as 38.15X and as low as 14.95X, with a median of 20.32X, as the chart below shows:
Price-to-Earnings Ratio Versus S&P 500
Four Diversified Operations Stocks to Keep a Close Eye On
LSB Industries: Based in Oklahoma City, OK, the company manufactures and markets nitrogen-based fertilizers and chemical products, including ammonium nitrate, ammonia and sulfuric acids for various industrial applications. It serves sectors such as agriculture, water treatment, metal processing and food refrigeration. LXU is benefiting from an increase in ammonia selling prices and lower natural gas costs. Also, higher demand for nitrogen bodes well .
The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2024 earnings has remained steady in the past 60 days. Its shares have gained 9.8% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: LXU
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 roofing granules and electrical markets. Solid electronics demand, backed by an increase in production volume by electronics original equipment manufacturer (OEM) customers, is aiding its Transportation and Electronics segment.
Shares of this Zacks Rank #3 (Hold) company have gained 97.4% 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
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 with customers undertaking several projects related to the replacement of older and existing roofs on non-residential structures bode well for it.
Shares of the Zacks Rank #3 company have surged 24.8% in the past year. The company delivered better-than-expected results in each of the trailing four quarters, the average surprise being 15.7%.
Price and Consensus: CSL
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 increased residential volume, driven by the resiliency of repair and remodeling activity in the construction market. Its investment in productivity, innovation and capacity expansion is expected to drive performance in the quarters ahead.
Shares of this Zacks Rank #3 company have soared 32.3% in the past year. It delivered an earnings surprise of 21.8%, on average, beating estimates in three of the last four quarters while missing the mark in one.
Price and Consensus: GFF
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