U.S. Manufacturing Flourishing on Strong Demand: 5 Top Picks
We have narrowed down our search to five manufacturing stocks with strong growth potential for 2021. These are: DE, DOV, HUBB, MIDD and IEX.
U.S. manufacturing industries are at the forefront of the economy's revival from the unprecedented coronavirus-led devastations. In the pandemic-era, U.S. manufacturing has shown a V-shaped recovery. The emergence of the Delta variant of coronavirus failed to derail the steady improvement of this segment.
It was not only the pandemic, which hurt U.S. manufacturing activities. This segment had struggled throughout 2019 due to an intense trade war between the United States and China. Therefore, the ongoing recovery of U.S. manufacturing is highly commendable.
U.S. Manufacturing Thriving
On Sep 1, the Institute of Supply Management (ISM) reported that its manufacturing Purchasing Managers' Index (PMI) increased to 59.9% in August from 59.5% in July. The consensus estimate was 58.3%. Any reading above 50% indicates expansion in U.S. manufacturing activities. The reading for August reflects the 15th consecutive month of growth.
The demand for manufacturing products remained robust. Consequently, the new orders index increased to 66.7% in August from 64.9% in July. The production index rose to 60% in August from 58.4% in the previous month.
Despite growing demand, manufacturers are facing trouble owing to the supply-chain disruptions during the pandemic and shortage of skilled labor. As a result, the backlog of orders index climbed to 68.2% in August from 65% in July. The employment index dropped to 49% last month from 52.9% in July.
Importantly, the Prices Index (prices paid by manufacturers for producing goods) decreased to 79.4% in August from 85.7% in July. This marked the second month of decline in a row and the first reading below 80% since December 2020. The index was as high as 92.1% in June. The gradual decline of this key index has clearly indicated that the cost-push inflation in U.S. economy is possibly dwindling.
The ISM reported that sixteen out of 18 manufacturing industries covered by the firm registered growth in August. All of the six biggest manufacturing industries posted moderate to strong growth in August.
Moreover, the IHS Markit reported that the final reading of its U.S. manufacturing PMI for August came in at 61.1% compared with 61.2% in the preliminary reading and 63.4% in July. Any reading above 60% is generally recognized as exceptional.
The economic effect of the Delta variant of coronavirus may not be as severe as last year when there was no vaccine. More than 60% of U.S. citizens have already received at least one shot. As the U.S. and other major global economies reopen, the manufacturing sector should strengthen as export demand for high-tech manufacturing products of the country will likely increase.
U.S. manufacturers across sizes are expanding their scale of operations and hiring more despite soaring wages and salaries to cater to robust demand. The sky-high savings are allowing U.S. citizens to indulge in their demands that were pent up during lockdowns and in turn compelling manufacturers to expand their scale of operations.
Finally, the Fed has decided to keep the benchmark interest rate as low as 0-0.25% so long the economy achieved substantial progress, especially the labor market. A low interest rate will significantly reduce the cost of capital and make U.S. currency cheaper in the foreign exchange market, making the country's manufacturing products more competitively priced.
Our Top Picks
At this stage, it will be prudent to invest in manufacturing stocks with a favorable Zacks Rank. We have narrowed down our search to five stocks with strong growth potential for 2021 that have witnessed robust earnings estimate revisions within the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Deere & Co. DE is likely to benefit from growth in non-residential investment and strong order activity from independent rental companies. Focus on investing in new products equipped with the latest technology and features to help make farming automated and to expand in precision agriculture will drive growth in the long haul.
The company has an expected earnings growth rate of more than 100% for the current year (ending October 2021). The Zacks Consensus Estimate for current-year earnings improved 5.1% over the last 30 days. The stock has jumped 40% year to date.
Dover Corp. DOV is poised to benefit from strong end-market demand, bookings rates and robust backlog in the current year. Strong growth in pumps and process solutions, fueling solutions, food retail, and marking & coding and automotive aftermarket businesses is aiding the company. Its cost-reduction initiatives, acquisitions, e-commerce, new product development and inorganic investment in core business platforms should also drive growth.
The company has an expected earnings growth rate of 32.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.8% over the last 30 days. The stock has climbed 37.8% year to date.
IDEX Corp. IEX is poised to gain from a diversified business structure, solid product portfolio, execution abilities and growth investments (more exposure in emerging markets, productivity enhancement and digitization).
It serves customers in various markets, including life science, fire and rescue, water & wastewater, chemical, agricultural, food, general industrial, and energy industries. As a result, gains in one or more markets will help in offsetting the weakness in the other markets.
The company has an expected earnings growth rate of 22.4% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 7 days. The stock has surged 10.8% year to date.
The Middleby Corp. MIDD is poised to benefit from increasing orders across its segments along with a robust backlog for the quarters ahead. Also, its efforts to broaden the product portfolio and technological advancement are likely to be advantageous. Synergistic gains from the acquired assets might be beneficial as well, going forward.
The company has an expected earnings growth rate of 68.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.9% over the last 30 days. The stock has soared 41.9% year to date.
Hubbell Inc. HUBB is engaged in the design, manufacture and sale of electrical and electronic products to commercial, industrial, utility and telecommunications markets in the United States and internationally. It operates through two segments — Electrical Solution and Utility Solution.
The company has an expected earnings growth rate of 14.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.9% over the last 30 days. The stock has advanced 29.5% year to date.
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