Easing supply chain disruptions and reduced lead times bode well for the Zacks Diversified Operations industry. Pricing actions to counter raw material cost inflation are aiding the industry participants’ margin performance. While the Federal Reserve’s continued interest rate hikes are weighing on the manufacturing sector, strength across prominent end markets acts as a key catalyst of the industry’s growth in the near term.
Amid the buoyancy in the industry, General Electric (GE – Free Report) , Vector Group (VGR – Free Report) and Live Ventures (LIVE – Free Report) are poised for growth.
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
Weakness in the Manufacturing Sector: Although at a slower rate, inflation continues to rise, prompting the federal reserve to hike interest rates. This has been taking a toll on the manufacturing sector as evident from Institute for Supply Management’s (ISM) latest report. In March, the Manufacturing Purchasing Manager’s Index touched 46.3%, reflecting a contraction in manufacturing activities for the fifth consecutive month. A figure below 50 indicates a contraction in manufacturing activity. The New Orders Index has remained in contraction territory for the past several months. Amid the slowdown in the manufacturing sector, industry participants are experiencing a low-demand environment. However, a turnaround in the situation is expected in the second half of 2023 as the U.S. economy remains healthy.
Easing Supply Chain Issues: While supply chain issues remain, the situation has substantially improved, with companies seeing reduced lead times and faster deliveries. These augur well for the industry’s growth in 2023. Pricing actions to mitigate raw material cost inflation support the industry players’ margin performance. The digitalization of business operations has enabled industry participants to boost their competitiveness with enhanced operational productivity and product quality.
Strength Across Key End-Markets: Despite the slowdown in manufacturing activities, demand across key end markets remains stable. Companies offering construction materials are expected to benefit from the strengthening reroofing market in the United States. Companies with exposure to the life sciences vertical should benefit from strength across instruments and consumables businesses, while those catering to the Biotechnology vertical should benefit from robust customer activity in the bioprocessing business. Continued recovery in the commercial market augurs well for companies focused on the Aerospace division. Companies with exposure to the transportation and electronics market should gain from growth in advanced materials, commercial solutions and transportation safety businesses.
Zacks Industry Rank Reflects Healthy Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #54. This rank places it in the top 22% 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 bright 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 position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. The industry’s earnings estimate has been revised upward by 12.4% since 2022 end.
Given the bullish near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it is worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Lags S&P 500
Over the past year, the Zacks Diversified Operations has underperformed the Zacks S&P 500 composite index. The industry has gained 4.8% compared with the S&P 500 Index’s 13.4% increase.
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 10.3X compared with the S&P 500’s 11.
Over the past five years, the industry has traded as high as 15.14X, as low as 8.45X and at the median of 10.79X, as the chart below shows:
EV/EBITDA Ratio (F12M) Versus S&P 500
3 Diversified Operations Stocks to Buy
Each of the stocks mentioned below carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
General Electric: Headquartered in Boston, MA, General Electric is a multinational conglomerate operating in the aviation, power, renewable energy, digital industry, additive manufacturing and venture capital and finance verticals. Strength in the Aerospace segment owing to continued recovery in the commercial market is a key growth driver for GE. Easing supply chain disruptions and rebound in the Power segment should support the company’s growth in the near term.
The Zacks Consensus Estimate for General Electric’s 2023 earnings has been revised upward by 2.6% in the past 60 days. The stock has surged 46.3% in the past six months.
Price and Consensus: GE
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Vector Group: A diversified holding company, Vector Group operates through its subsidiaries Liggett Group LLC and Vector Tobacco Inc., manufacturing cigarette products for adult smokers. VGR also owns New Valley LLC, which holds minority investments in real estate projects. Higher tobacco volumes and the transition of the Montego brand strategy from volume-based to income-based are driving the company’s growth.
The Zacks Consensus Estimate for Vector Group’s 2023 earnings has been revised upward by 5.5% in the past 60 days. The stock has rallied 33.3% in the past six months.
Price and Consensus: VGR
Live Ventures: A diversified holding company, LIVE Ventures focuses on value-oriented acquisitions of domestic middle-market companies. The January 2023 acquisition of Flooring Liquidators, a leading retailer and installer of floors, carpets, and countertops, should fuel the company’s growth. The acquisition of Kinetic should continue to boost the Steel Manufacturing segment.
The Zacks Consensus Estimate for Live Ventures’ fiscal 2023 earnings has been revised upward by approximately 34% in the past 60 days. The stock has gained 31.8% in the past six months.
Price and Consensus: LIVE
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Original Article: https://www.zacks.com/commentary/2076191/3-top-stocks-from-the-buoyant-diversified-operations-industry?art_rec=home-home
