The Zacks Diversified Operations industry is experiencing weakness due to a slowdown in the manufacturing sector and lower customer demand. Persistent supply chain disruptions, raw material cost-inflation and labor shortages are added headwinds in the industry. These factors point to a bleak outlook for the industry in the near term.
Despite the slowdown in the manufacturing sector, strength across some prominent end-markets should drive growth of ITT Inc. (ITT – Free Report) and Griffon Corporation (GFF – Free Report) .
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. The industry players also provide related services to a large customer base. In addition, 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.
3 Trends Shaping the Future of the Diversified Operations Industry
Slowdown in Manufacturing Activities: Amid growing economic uncertainties, thanks to the Federal Reserve’s monetary policy tightening, a slowdown in the manufacturing sector weighs on consumer demand in the industry. Per the Institute for Supply Management (ISM) report, economic activity contracted for the second consecutive month in December 2022. The Manufacturing Purchasing Manager’s Index dipped 0.6 percentage point to 48.4% last December, with a decline in New Orders Index and Production Index. A figure below 50 indicates a contraction in manufacturing activity. As the impact of interest rate hikes becomes more prominent and manufacturing activities exhibit signs of continued contraction in the near term, customer demand is likely to remain depressed.
Supply Chain & Cost Woes: Supply chain disruptions, primarily related to electronic component shortages, continue to plague the industry. Labor shortages are added headwinds in the industry. High raw material, logistics and freight costs are hurting the margins and profitability of industry participants. Pricing actions and cost-control measures are partly offsetting the adversity.
Strength Across Key End-Markets: Despite the slowdown in manufacturing activities, strong demand across some prominent end-markets, like automotive, electronics, safety, commercial aerospace and defense, rail and general industrial, should help the industry stay afloat. Companies offering construction materials are expected to benefit from the strengthening reroofing market in the United States, owing to new construction activity. Companies with exposure to the life sciences vertical should benefit from robust activity in the bioprocessing business, and strength in instrument businesses, while those with exposure to the diagnostics vertical should gain from healthy demand for products related to respiratory testing. Continued recovery in the commercial market bodes well for companies operating in the Aerospace vertical, offering commercial jet engines and components, and aftermarket services.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #186. This rank places it in the bottom 26% 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 near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 the negative earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group’s 2022 and 2023 earnings per share has decreased 8.4% and 19.6%, respectively over the past year.
Despite the industry’s drab near-term prospects, we will present a few stocks for your consideration. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Outperforms S&P 500
Over the past year, the Zacks Diversified Operations has outperformed the Zacks S&P 500 composite index. The industry has declined 12.7% compared with the S&P 500 Index’s 14.1% decrease.
One-Year Price Performance
Industry’s Current Valuation
On the basis of EV/EBITDA (F12M), which is a commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 9.57X compared with the S&P 500’s 10.26.
Over the past five years, the industry has traded as high as 15.14X, as low as 8.45X and at the median of 10.81X, as the chart below shows:
EV/EBITDA Ratio (F12M) Versus S&P 500
2 Diversified Operations Stocks to Keep a Tab On
Below we discuss two stocks from the diversified operations industry that are poised for growth despite challenges in the industry. These stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy).
Griffon: Robust growth in the Consumer and Professional Products segment owing to benefits from the January 2022 acquisition of Hunter Fan is aiding GFF. Strength in the Home and Building Products segment due to higher commercial volumes should buoy Griffon’s performance in 2023. The company sports a Zacks Rank #1.
A diversified holding company, Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. The company delivered a trailing four-quarter earnings surprise of 119.1%, on average. The stock has surged 52.1% in the past six months.
Price and Consensus: GFF
ITT: Strength in end markets like chemical and industrial pumps, commercial aerospace and defense, rail and general industrial bodes well for ITT’s growth. Strong demand for pumps, connectors, aerospace and defense components should drive orders, thus fueling the company’s growth. Successive acquisitions to expand operations should bolster the company’s top line. ITT carries a Zacks Rank #2.
Headquartered in New York City, ITT is a leader in high-technology engineering and manufacturing projects, engaging in the design, manufacture and sale of a wide range of engineered products and services. The company pulled off a trailing four-quarter earnings surprise of 1.2%. on average. It has an expected earnings growth rate of 8.4% and 10.9% for 2022 and 2023 respectively. The stock has rallied 32.8% in the past six months.
Price and Consensus: ITT