The U.S manufacturing sector has been contracting for four consecutive months amid the U.S.-Sino trade turbulence and weakening business conditions. Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) dipped further to 48.1% in November 2019 from the October reading of 48.3%.
The PMI reading had been showing signs of deceleration since this April but had remained above 50, which denotes expansion. However, it declined to 49.1% in August, which marked an end to the 35 consecutive months of expansion. The index has steadfastly remained below 50 since then. In fact, in September, the PMI index hit the lowest point in a decade, at 47.8%.
Of the 18 manufacturing industries, only five reported growth in November. The New Orders Index slumped to 47.2% in November from 49.1% in October. Production Index came in at 49.1% in November compared with the 46.2% registered in October. Employment Index was 46.6% in November, down from October’s 47.7%. Notably, the new orders index, production index and employment index displayed contraction for the fourth consecutive month.
Despite the slowdown over the past few months, the PMI has averaged 51.8% over the last 12 months, ranging from a low of 47.8% to a high of 56.6%.
Sector Performance & Projections
The Industrial Products sector has underperformed the S&P 500 market over the past year, thanks to uncertainties related to the impact of tariffs. Given that steel is a primary raw material, every company involved in manufacturing bore the brunt of rising steel prices due to tariffs. In the past year, the sector has gained 9.7%, while the S&P 500 has gone up 15.5%.
Earnings for the Industrial Products Sector, one of the 16 broad Zacks sectors, slipped 2.1% in the third quarter of 2019. Per the latest Earnings Trends report, the sector is expected to log a decline of 5.7% in earnings in the fourth quarter. However, the downtrend is not limited to this sector alone. In the December-end quarter, seven of the 16 Zacks Sectors are expected to witness drop in earnings.
Will the Sector Rebound?
Any positive development on the U.S.-Sino trade-war front will aid the sector’s recovery. Improvement in residential and non-residential construction and revival in infrastructure demand will drive the sector’s growth.
In the wake of low demand and cost inflation, the manufacturing companies continue to sustain their margins through pricing actions and cost control, increasing productivity and elimination of waste.
Our Picks
Despite the overall weakness in the industrial sector, we suggest to bet on these four stocks which are set to deliver improved results for the fourth quarter and are backed by a Zacks Rank #1 (Strong Buy) or 2 (Buy), and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, combined with a Zacks Rank #1 or 2, offer the best investment opportunities for investors. You can see the complete list of today’s Zacks #1 Rank stocks here.
Also, these companies have delivered solid returns, year to date, and have outperformed the S&P 500 and overall sector, as shown in the chart below. These companies also have a positive earnings surprise history trend.
Northwest Pipe Company NWPX: The Zacks Consensus Estimate for this Vancouver, WA-based company’s current-quarter earnings reflects a year-over-year surge of 196.3%. The quarterly estimate moved 53.8% north over the past 90 days. The company delivered an average positive earnings surprise of 20.14% over the trailing four quarters. The company sports a Zacks Rank #1 and has a VGM Score of B, at present. Year to date, its shares have gained 45.7%.
Dover Corporation DOV: This New York-based company currently carries a Zacks Rank of 2 and has a VGM Score of B. The Zacks Consensus Estimate for the ongoing-quarter earnings reflects year-over-year growth of 1.40%. Quarterly estimates moved up 3% over the past 90 days. The company recorded an average positive earnings surprise of 6.70% over the preceding four quarters. It has an estimated long-term earnings growth rate of 11.5%. Its shares have rallied 55.5% so far this year.
Albany International Corp. AIN: This Rochester, NH-based company reported an average positive earnings surprise of 21.27% in the last four quarters. The Zacks Consensus Estimate for the fourth quarter suggests year-over-year growth of 44.4%. The company’s estimate witnessed 1.3% upward revision in 90 days’ time. Currently, the company carries a Zacks Rank #2 and has a VGM Score of B. The stock has appreciated 32.9% in the year-to-date period.
CIRCOR International, Inc. CIR: This Burlington, MA-based company also holds a Zacks Rank of 2 and has a VGM Score of B, at present. The company came up with an average positive earnings surprise of 11.92% over the past four quarters. The Zacks Consensus Estimate for the current-quarter earnings indicates 41.9% year-over-year growth. The Zacks Consensus Estimate has moved 4.8% upward, over the past 90 days. Year to date, the company’s shares have surged 105.7%.
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