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Zacks Industry Outlook Highlights General Electric, 3M Company and ITT.
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Today, Zacks Equity Research discusses General Electric GE, 3M Company MMM and ITT Inc. ITT.
Industry: Diversified Operations
The Zacks Diversified Operations industry is grappling with reduced demand across several end markets due to lower consumer spending as a result of inflationary pressure. While the manufacturing sector remains in the contraction territory, the gradual uptick in manufacturing activities signals an improvement in demand for the industry. Easing supply chains and cost-control measures are expected to aid the bottom lines of these companies.
Companies like General Electric GE, 3M Company MMM and ITT Inc. ITT are well-placed to capitalize on the buoyancy in the industry.
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
Persistent Weakness in the Manufacturing Sector: Continued weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management (ISM) report, in August, the Manufacturing PMI (Purchasing Manager’s Index) touched 47.6%, contracting for the 10th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index remained in the contraction territory at 46.8%, declining 0.5 percentage points from the figure recorded in July. While the manufacturing sector remains in the contraction territory, it is showing signs of gradual improvement. The Manufacturing PMI has been steadily improving over the past few months. In August, the index increased 1.2 percentage points from the figure recorded in July. The uptick in manufacturing activities augurs well for the diversified operations industry.
Inflationary Pressure: Companies with exposure to the electronics, healthcare and consumer verticals are experiencing lower demand due to reduced consumer spending as a result of inflationary pressure. Within the electronics division, there is softness, particularly for smartphones, tablets and TVs. Within the consumer segment, companies are witnessing a decline in home improvement, stationery and office businesses. Given the high inflation levels, consumer spending is likely to remain suppressed through 2023, weighing on the top line of these companies. Reduced demand in the residential end market is also a concern for the industry.
Easing Supply-Chain Disruptions: While supply-chain disruptions persist, especially related to the availability of electronic components, the situation has improved, as evident from the ISM report’s Supplier Deliveries Index, which reflected faster deliveries for the 11th straight month in August. Easing supply-chain issues should support diversified operations companies’ growth in 2023. Cost-control measures support the margins of the industry participants despite inflationary pressure.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #113. This rank places it in the top 45% 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.
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 6.6% compared with the S&P 500 Index’s 15.9% increase.
Industry’s Current Valuation
On the basis of EV/EBITDA (TTM), which is the commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 14.52X compared with the S&P 500’s 13.29.
Over the past five years, the industry has traded as high as 24.72X, as low as 5.87X and at the median of 10.84X.
3 Diversified Operations Stocks to Buy
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. GE, sporting a Zacks Rank #1 (Strong Buy), is poised for growth on the back of strength across its Aerospace segment due to a significant increase in LEAP engine deliveries. Recovery in GE Vernova’s (the combined operations of GE Power and Renewable Energy segments) operations owing to strength in the gas turbine business and higher equipment demand at Grid and Onshore Wind in North America bolster GE’s growth.
The Zacks Consensus Estimate for General Electric’s 2023 earnings has been revised upward by 12.8% in the past 60 days. The stock has rallied 29.6% in the past six months.
3M: Headquartered in St. Paul, MN, 3M, together with its subsidiaries, operates as a diversified technology firm. Strength in the automotive aftermarket business and growth in the auto OEM business augur well for 3M. The company’s cost-cutting measures are expected to improve margins and drive the bottom line. Improving supply chains are expected to drive organic growth and boost earnings for this Zacks Rank #2 (Buy) company.
Reduced consumer demand due to inflationary pressure has primarily resulted in shares of 3M declining 3.1% in the past six months. However, the Zacks Consensus Estimate for 3M’s 2023 earnings has been revised upward by 3.5% in the past 60 days.
ITT: Headquartered in New York City, ITT is a global multi-industry leader in high-technology engineering and manufacturing projects. Strength in the industrial, aerospace and defense end markets is driving this Zacks Rank #2 company’s growth. Investments in product innovation across its friction technologies, connectors and pump businesses are expected to fuel ITT’s growth.
The Zacks Consensus Estimate for ITT’s 2023 earnings has been revised upward by 4.5% in the past 60 days. The stock has gained around 21% in the past six months.
General Electric Company (GE): Free Stock Analysis Report
3M Company (MMM): Free Stock Analysis Report
ITT Inc. (ITT): Free Stock Analysis Report
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