3 metal fabrication stocks to watch amid industry head winds – November 18, 2021
Zacks’ Metal Products Industry – Supply and Manufacturing has seen strong growth in order levels so far this year, reflecting improved demand in its end markets since the resumption of operations. However, the industry is struggling to keep pace with high levels of demand due to labor shortages and constraints related to supply issues. The high costs of raw materials and freight remain an obstacle. Nonetheless, industry players, including GrafTech International Ltd. (AEP – Free report), Worthington Industries, Inc. (JOB – Free report) and North West Pipe Company (NWPX – Free Report) will benefit from high demand levels, cost management, a focus on improving efficiency and investments in automation.
About the industry
Zacks’ Metal Products Industry – Supply and Manufacturing includes metal fabrication and processing service providers that transform metal into metal parts, machines or components for use in other industries. Their processes include forging, stamping, bending, forming, and machining used to shape individual pieces of metal, as well as welding and assembly to join pieces. Common raw materials used by metal fabrication companies include sheet metal, formed or expanded metal, tubing, welding wire or rod, casting, etc. The companies serve markets such as construction, mining, aerospace and defense, automotive, agriculture, oil and gas. , electronic / electrical components, industrial and consumer equipment.
What Shapes the Future of Metal Products – Supply & Manufacturing Industry
Strong command levels: The pandemic weakened demand in many of the industry’s end markets, including transportation, mining and industrial at the start of last year, as customers had to temporarily slow down their manufacturing facilities amid restrictions imposed by governments around the world. Supported by the gradual reopening of businesses, the fabricated metal products industry has emerged from this crisis, as evidenced by growth in new orders, production and backlog levels since July of last year. According to the Fed’s latest industrial production report, overall production of metal products in the United States rose 3.3% in the third quarter of 2021, following growth of 3.1% and 7.5% in the second quarter and in the first trimester, respectively. In October, the industry’s production level improved 4.9% year over year.
Higher costs and supply chain issues remain concerns: The industry has been facing high raw material costs, especially steel, since mid-2020. Steel prices are expected to remain on the rise in the fourth quarter of 2021 and 2022, as well as due to improving demand and lingering supply constraints. The industry is currently facing a labor shortage, extended delivery times for raw materials and transportation constraints, which are expected to persist over the next few quarters. The players in the sector are therefore doing everything they can to strengthen their financial situation, save their cash flow and improve their profitability. The companies have implemented cost reduction actions, likely to help maintain margins in this scenario.
Automation, growth of end markets to act as catalysts: The customer-centric approach of the industry to provide cost-effective technical solutions, automation to increase efficiency and reduce labor costs, and the development of new and innovative products will drive growth in the coming days. The growth of end-use sectors such as manufacturing, aerospace and automotive is expected to drive the metal fabrication market over the next few years. Developing countries hold promise thanks to rapid industrialization, which will create demand.
Zacks’ ranking in industry indicates poor outlook
The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates a bleak outlook for the near term. Zacks’ Metal Products Industry – Supply and Manufacturing, which is a group of 13 stocks within the larger Industrials sector, currently holds a Zacks Industry Rank # 211, which places it in the lowest 17%. of the 256 Zacks industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of industries ranked by Zacks is the result of negative earnings prospects for the constituent companies as a whole. Looking at the revisions to the overall earnings estimates, it appears that analysts are gradually losing confidence in the earnings growth potential of this group. Over the past three months, industry profit estimates for the current year have fallen 5%.
Despite the bleak outlook for the near term, we will present a few Metal Products – Supply and Manufacturing inventories that can be maintained given their growth prospects. But it’s worth looking first at the industry’s shareholder returns and the current valuation.
Industry Outperforms Sector, Lags S&P 500
Zacks’ Metal Products Industry – Sourcing and Manufacturing has outperformed its own sector. However, it has underperformed the S&P 500 composite over the past year. Over this period, the industry gained 22.6% compared to the sector’s growth of 20%. Meanwhile, the Zacks S&P 500 composite rose 32.3%.
One-year price performance
Current industry assessment
Based on the 12-month forward EV / EBITDA ratio, which is a multiple commonly used to value Metal Products – Supply and Manufacturing companies, we see that the industry is currently trading at 7.77 versus 14.81 for the S&P 500 and for the Industrial Products sector. 12-month forecast EV / EBITDA of 19.22. This is illustrated in the graphics below.
Enterprise Value / EBITDA (EV / EBITDA) ratio F12M
Enterprise Value / EBITDA (EV / EBITDA) ratio F12M
Over the past five years, the industry has traded as high as 20.86 and as low as 5.01 with the median being 7.91.
3 metal products – Supply and manufacturing stocks to watch
Worthington: The company is well positioned to grow thanks to its three-tier strategy – Transformation, Innovation and Acquisitions. The transformation aspect focuses on improving the efficiency of capital and the profitability of its businesses. The innovation angle is focused on new product development, while acquisitions help increase product offerings and add higher margin companies. It recently acquired certain assets of US company BlankLight from Shiloh Industries, Inc., which expanded the capacity and capabilities of its laser welded products business. It recently entered into an agreement to acquire Tempel Steel Company which will make WOR a leader in the rapidly growing electrical steel market which includes transformers, machine motors and electric vehicle motors. The company leverages its capabilities in automation, analytics and advanced technologies, which will help it stay ahead of the curve. Supported by its proactive measures to cut costs and strong demand in end markets, the stock has appreciated 6% since the start of the year.
Zacks’ consensus estimate for Worthington’s current year earnings has risen 27% in the past 90 days. The estimate shows year-over-year growth of 3.5%. The company has a surprise earnings for the last four quarters of 25.8% on average. WOR currently carries a Zacks Rank # 1 (strong buy).
Price and consensus: WOR
Northwest Pipe: It ended the third quarter of 2021 with an order backlog of $ 273 million, including confirmed orders, the second highest level on record. The stock has appreciated by 3% since the start of the year. The growing demand for developed water sources and the pressing need to upgrade, repair and replace an aging U.S. water and sanitation system represent a huge opportunity for the company. With a strong balance sheet and strong liquidity position, Northwest Pipe continues to execute its growth strategy. It recently completed the acquisition of ParkUSA, a precast concrete and steel manufacturing company that develops and manufactures solutions for water, wastewater and the environment. It is expected to be immediately accretive to company profits. The completion of this acquisition marks Northwest Pipe’s third major transaction in just over three years. In July 2018, the company acquired Ameron Water Transmission Group, while it acquired Geneva Pipe and Precast Company in January 2020.
Zacks’ consensus estimate for Northwest Pipe’s current year earnings has risen 25% in the past 90 days. The company has a surprise of 19% on average over the last four quarters. The company currently carries a Zacks Rank # 2 (Buy).
Price and consensus: NWPX
GrafTech International: The company is benefiting from strong market demand and rising prices for graphite electrodes, leading to a 19.8% increase in its share price since the start of the year. Prices for graphite electrodes are expected to increase further in the current quarter and into 2022, supported by continued strength in the global steel market, which bodes well for EAF. The company has built capacity and improved efficiency across its manufacturing footprint this year, given the high demand for graphite electrodes.
The company is the only large-scale producer of graphite electrodes to be substantially vertically integrated into petroleum needle coke, a key raw material for the manufacture of graphite electrodes. This unique position provides a competitive advantage in terms of product quality and cost. GrafTech has a surprise profit for the last four quarters of 19.7% on average. The company currently holds a Zacks Rank # 3 (Hold).
Price and consensus: AEP