Chicago, Illinois-November 19, 2021-Today, Zacks Equity Research discussed metal manufacturing, including GrafTech International Ltd. EAF, Worthington Industries, Inc. WOR, and Northwest Pipe Company NWPX.
Link: https://www.zacks.com/commentary/1829379/3-metal-fabrication-stocks-to-watch-amid-industry-headwinds
Zacks Metal Products-The sourcing and manufacturing industry has seen strong growth in order levels so far this year, reflecting the improvement in end market demand since the business resumed operations. However, due to labor shortages and supply constraints, the industry is struggling to keep up with high levels of demand. High raw material and freight costs are still a disadvantage. Nonetheless, industry players including GrafTech, Worthington Industries, and Northwest Pipe Co. will benefit from strong demand levels, cost management, and focus on improving efficiency and automation investments.
Zacks Metal Products-The sourcing and manufacturing industry includes metal processing and manufacturing service providers that convert metal into metal parts, machinery or components used in other industries. Their processes include forging, stamping, bending, forming, and machining to shape individual metal parts, as well as welding and assembly to connect parts.
Common raw materials used by metal manufacturing companies include sheets, formed or expanded metals, pipes, welding wires or electrodes, castings, etc. The markets served by the company include construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronic/electrical components, industrial equipment, and general consumers.
Strong order levels: At the beginning of last year, due to restrictions imposed by global governments, customers had to temporarily idle manufacturing facilities. Therefore, the epidemic has weakened the demand for multiple end markets in the industry, including transportation, mining, and industry. With the support of the gradual reopening of enterprises, the metal products industry has come out of the downturn, which can be seen from the increase in new orders, output and backlog levels since July last year.
According to the Fed’s latest industrial production report, the total output of metal products in the United States increased by 3.3% in the third quarter of 2021, following the growth of 3.1% and 7.5% in the second and first quarters, respectively. In October, the industry's production level increased by 4.9% year-on-year.
Higher costs and supply chain issues remain worrying: since mid-2020, the industry has been facing high raw material costs, especially steel. It is expected that steel prices will continue to rise in the fourth quarter of 2021 and 2022, as demand improves and supply continues to be restricted.
The industry is currently facing labor shortages, extended delivery times for raw materials, and transportation restrictions. These problems are expected to persist in the coming quarters. Therefore, industry participants are making every effort to improve their financial situation, save cash and increase profitability. These companies have been implementing cost-reducing actions, which may help maintain profit margins in this situation.
The growth of automation and end markets serves as a catalyst: the industry’s customer-centric approach provides 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. It is expected that in the next few years, the growth of end-use industries such as manufacturing, aerospace and automotive will drive the development of the metal manufacturing market. Developing countries are full of hope for rapid industrialization, which will create demand.
The Zacks Industry Rank of the group is basically the average of the Zacks Rank of all member stocks, indicating that the near-term outlook is bleak. The Zacks Metal Products-Purchasing and Manufacturing industry is a 13-stock group in the broader industrial products industry. It currently ranks 211 in the Zacks industry and is the bottom 17% of the 256 Zacks industry. Our research shows that the Zacks top 50% of industries outperform the bottom 50% by more than 2 to 1.
The positioning of the industry in the bottom 50% of the Zacks-ranked industry is the result of poor overall profit prospects for the constituent companies. Judging from the overall profit forecast revision, analysts seem to be gradually losing confidence in the group's profit growth potential. In the past three months, the industry’s profit forecast for this year has fallen by 5%.
Although the near-term outlook is bleak, we will show some metal products-sourcing and manufacturing inventories, which can be kept in view of its growth prospects. But it is worth looking at the shareholder returns and current valuations of the industry first.
Zacks Metal Products-The sourcing and manufacturing industries outperformed their own industries. However, its performance in the past year has lagged behind the S&P 500 index. During this period, the industry grew by 22.6%, while the industry's growth rate was 20%. At the same time, the Zacks S&P 500 composite index rose 32.3%.
Based on the forward 12-month EV/EBITDA ratio (which is a common multiple for evaluating metal products-sourcing and manufacturing companies), we see that the industry’s current transaction price is 7.77, while the S&P 500 index is 14.81. The transaction price is a forward 12-month EV/EBITDA of 19.22.
In the past five years, the transaction price of this industry was as high as 20.86 and as low as 5.01, with a median of 7.91.
Worthington: The company is fully prepared for growth through its three-tier strategy-transformation, innovation and acquisition. The focus of transformation is to improve the capital efficiency and profitability of its business. The innovation perspective focuses on new product development, and acquisitions help increase product supply and increase business with higher profit margins.
It recently acquired part of the assets of Shiloh Industries, Inc.'s BlankLight business in the United States, expanding the production capacity and capabilities of its laser welding products business. It recently signed an agreement to acquire Tempel Steel Company, which will make WOR a leader in the rapidly growing electrical steel market, including transformers, machine motors, and electric vehicle motors.
The company is building its capabilities in automation, analysis and advanced technology, which in turn will help it maintain its leading position. Supported by its active measures to cut costs and strong end-market demand, the stock has risen 6% so far this year.
The Zacks consensus estimate of Worthington’s earnings for the year has risen by 27% in the past 90 days. This estimate indicates a year-on-year increase of 3.5%. The company’s average profit for the past four quarters was unexpectedly 25.8%. WOR currently has a Zacks Rank #1 (Strong Buy). You can view the full list of today's Zacks #1 Rank stocks here.
Northwest Pipeline: As of the third quarter of 2021, its backlog of orders was $273 million, including confirmed orders-the second highest level on record. The stock has risen 3% so far this year. The growing demand for developed water sources and the urgent need to upgrade, repair, and replace aging American water and wastewater systems provide companies with tremendous opportunities.
Due to a strong balance sheet and solid liquidity position, Northwest Pipeline continues to execute its growth strategy. It recently completed the acquisition of ParkUSA, a company based on precast concrete and steel manufacturing that develops and manufactures water, wastewater and environmental solutions. It is expected to increase the company's earnings immediately.
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, and at the same time acquired Geneva Pipe and Precast Company in January 2020.
The Zacks consensus estimate of Northwest Pipe’s earnings this year has risen by 25% in the past 90 days. The company’s earnings surprises averaged 19% for four consecutive quarters. The company currently has a Zacks Rank #2 (Buy).
GrafTech International: The company benefited from strong market demand and rising graphite electrode prices, which led to its year-to-date stock price increase of 19.8%. Supported by the continued strength of the global steel market, graphite electrode prices are expected to rise further this quarter and 2022, which bodes well for EAF. In view of the strong demand for graphite electrodes, the company has been enhancing its manufacturing capabilities and improving efficiency this year.
The company is the only large-scale graphite electrode manufacturer that vertically integrates petroleum needle coke, which is a key raw material for graphite electrode manufacturing. This unique position provides a competitive advantage in terms of product quality and cost. GrafTech's earnings surprise for four consecutive quarters averaged 19.7%. The company's current Zacks ranks third (holding).
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