The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers. These companies are engaged in conversion, manufacturing and fabrication of metal into end products. Important fabricated metal processes include forging, stamping, bending, forming, and machining which are utilized to shape individual pieces of metal. Meanwhile, other processes such as welding and assembling are used to join separate parts together.
The industry participants cater to a wide array of markets, including construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronics/electrical components, industrial equipment and general consumer markets.
Let's take a look at the three major themes currently governing the industry:
The industry’s largest material purchases include resins, steel, aluminum, copper, other metals and energy (electricity, natural gas and fuel). Of late, higher material costs, primarily related to oil and metal-based commodities, have been hurting the industry. Escalation of costs can be attributed to imposition of tariffs. Nevertheless, some players in the industry have been successful in mitigating cost inflation through price hikes, resourcing to alternate suppliers to secure better pricing or avoid import and transportation costs. However, these measures take time and it might not be always feasible to pass on higher costs to customers, given the competitive environment. This in turn could adversely impact the industry’s margins. Additionally, finding skilled labor is becoming increasingly difficult as the industry continues to embrace technology.
The latest industrial production report of the Federal Reserve revealed that aggregate production of fabricated metal products in the United States logged growth of 1.3% in the first quarter of 2019. Overall production has gone up 2.1% in the 12-months ended April 2019. Further, per the Institute for Supply Management’s latest Manufacturing ISM Report, fabricated metal products reported growth in April aided by improvement in new orders, production, employment levels and backlog. This upbeat performance came despite cost inflation and supply chain challenges that the Metal Products - Procurement and Fabrication industry is currently facing, reflecting its strong fundamentals.
The Metal Products - Procurement and Fabrication industry’s prospects are closely aligned with that of the economy as it serves a wide array of markets. In the United States, business investment is likely to expand supported by favorable financial conditions and improving regulatory climate. Developing countries hold promise on account of rapid industrialization which will create demand. Further, the industry’s customer-focused approach to provide cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of new products and innovative products will help in sustaining growth. According to a report published by Transparency Market Research, the global metal fabrication market was valued at around $17 billion in 2017 and is anticipated to expand at a CAGR of over 3% from 2018 to 2026. Growth is likely to be spurred by the construction segment followed by the automotive sector. The North American market is expected to witness a CAGR of 4% during 2018-2026, fueled by rise in automation and technological upgrades.
Zacks Industry Rank Indicates Dismal Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Metal Products - Procurement and Fabrication industry, which is a 14-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #155, which places it at the bottom 39% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of this year, the industry’s earnings estimate for the current year has gone down 16%.
Despite the bleak near-term prospects of the industry, we will present a few Metal Products - Procurement and Fabrication that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500 and Sector on Shareholder Returns
The Metal Products - Procurement and Fabrication industry has underperformed its own sector and S&P 500 composite over the past year.
Over this period, the industry has fallen 26.7% compared with the sector’s decline of 6.4%. Meanwhile, the Zacks S&P 500 composite has rallied 4.4%.
One-Year Price Performance
Metal Products - Procurement and Fabrication Industry’s Valuation
On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Metal Products - Procurement and Fabrication companies, we see that the industry is currently trading at 6.9 compared with the S&P 500’s 10.7 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 13.7. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Over the last five years, the industry has traded as high as 14.7 to as low as 6.6, with the median being at 10.4.
Bottom Line
Mounting concerns over higher material costs, impact of tariffs, soaring transportation cost and supply constraints have weighed the industry down. Nevertheless, strong end-markets, supply chain initiatives, operational cost management and automation will drive the industry’s growth. A lower tax rate owing to the recently passed tax reform will aid margins.
We are presenting two stocks with a Zacks Rank #1 (Strong Buy), one with a Zacks Rank #2 (Buy) and one with a Zacks Rank #3 (Hold) that investors may consider betting on.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Northwest Pipe Company (NWPX): The Zacks Consensus Estimate for Vancouver, WA-based Northwest Pipe for earnings fiscal 2019 has gone up 24% over the past 90 days. It estimates long-term earnings growth of 10%. The company sports a Zacks Rank #1.
Price and Consensus: NWPX
The Timken Company (TKR): North Canton, Ohio- based company sports a Zacks Rank #1. Timken has a positive average earnings surprise history of 2.43% over the trailing four quarters and long-term earnings growth of 9.4%. The company’s Zacks Consensus Estimate for earnings for fiscal 2019 has moved north 10% over the past 90 days, indicating an improvement of 26.3% from the prior year.
Price and Consensus: TKR
TriMas Corporation (TRS): Bloomfield Hills, MI-based TriMas has a Zacks Rank #2. The company estimates long-term earnings growth of 5%. The Zacks Consensus Estimate for earnings for fiscal 2019 has moved up 2% over the past 90 days. The estimates for earnings per share project growth of 9.1% for fiscal 2019. TriMas has a positive average earnings surprise history of 4.56% over the trailing four quarters.
Price and Consensus: TRS
Kaiser Aluminum Corporation (KALU): Based in Foothill Ranch, CA, the company carries a Zacks Rank #3. The company has a positive average earnings surprise history of 2.94% over the trailing four quarters. The Zacks Consensus Estimate for earnings per share for fiscal 2019 projects growth of 10.36%. The estimates for earnings for fiscal 2019 have moved up 1% over the past 90 days. Price and Consensus: KALU
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