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Zacks Industry Outlook Highlights Norsk Hydro, The Timken and Northwest Pipe Company

For Immediate Release

Chicago, IL – November 7, 2022 – Today, Zacks Equity Research discusses Norsk Hydro ASA NHYDY, The Timken Co. TKR and Northwest Pipe Company NWPX.

Industry: Metal Fabrication Products

Link: https://www.zacks.com/commentary/2014380/3-metal-fabrication-stocks-to-watch-in-a-challenging-industry

The Zacks Metal Products - Procurement and Fabrication industry has been witnessing deceleration in demand of late due to muted customer spending.  Elevated raw material and freight costs weighed on the margins. The industry is also facing a labor crisis, coupled with the ongoing supply-chain issues and persistent shortages of critical materials. Such headwinds are affecting the industry’s production output.

In this scenario, industry players like  Norsk Hydro ASA, The Timken Co. and Northwest Pipe Company are expected to gain from their cost-management efforts, focus on improving efficiency and investment in automation.

About the Industry

The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers that transform metal into metal parts, machinery or components used across various other industries. Their processes include forging, stamping, bending, forming and machining, which are used in shaping individual pieces of metal, and welding and assembling to join parts.

The companies either use one of these processes or a combination of all. The most common raw materials utilized by metal fabrication companies include plate metal, formed or expanded metal, tube stock, welding wire or rod and casting. The industry players serve an array of markets, including construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronics/electrical components, industrial equipment and general consumer.

What's Shaping the Future of Metal Products - Procurement and Fabrication Industry

Strong Demand in End-Markets to Support Growth: The pandemic had weakened demand in several end markets of the industry, including transportation, mining and industrial. However, the fabricated metal products industry eventually came out of the slump, backed by the gradual business reopening and has been witnessing growth in orders, production and backlog levels since July 2021.

In recent times, the pace slackened due to lower customer spending. Even though the overall manufacturing sector continues witnessing strong demand, it is being constrained by supply-chain issues. Per the Fed’s latest industrial production report, the aggregate production of fabricated metal products in the United States was up 1.8% in the third quarter of 2022, a deceleration from the 1.9% growth in the second quarter of 2022 and 5.3% in the first quarter of 2022.

Nevertheless, over the 12-month period ended September 2022, production of fabricated metal products was up 5%. Once the situation normalizes, strong demand in the diverse end markets will drive the industry’s growth.

High Costs & Supply-Chain Woes Persist: The industry is currently facing input cost inflation (mainly steel) and transport and logistic costs. It has been struggling to cope with the increase in demand due to labor scarcity, supply-chain issues, high raw material lead times and constant unavailability of critical materials.

Dearth of labor remains an issue. The industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions for a while, which are likely to help sustain margins in this scenario.

Automation & End-Market Growth to Act as Catalysts: The industry’s customer-focused approach to provide cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of the latest and innovative products will drive growth in the days ahead. Growth in end-use sectors, such as manufacturing, aerospace and automotive is anticipated to benefit the metal fabrication market over the next few years. Developing countries hold promise owing to rapid industrialization. This, in turn, is likely to create demand.

Zacks Industry Rank Indicates Dim Prospects

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates tepid prospects in the near term. The Zacks Metal Products - Procurement and Fabrication industry, which is a 10-stock group within the broader Industrial Products sector, currently carries a Zacks Industry Rank #209, which places it in the bottom 17% of the 251 Zacks industries. 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.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has gone down 36%.

Before we present a few stocks that you may want to consider for your portfolio, let’s look at the industry’s recent stock-market performance and the valuation picture.

Industry Underperforms Sector & S&P 500

The Zacks Metal Products - Procurement and Fabrication industry has underperformed its sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has fallen 27.8% compared with the sector’s decline of 18.9% and the Zacks S&P 500 composite’s decrease of 22.5%.

Industry's Current Valuation

Based on the trailing 12-month EV/EBITDA ratio, a commonly used multiple for valuing the Metal Products - Procurement and Fabrication companies, the industry is currently trading at 7.76 compared with the S&P 500’s 11.30 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 17.52.

Over the last five years, the industry traded as high as 19.17 and as low as 5.24, with the median at 8.64.

3 Metal Products - Procurement and Fabrication Stocks to Keep Tabs On

Timken: The company continues to witness new business wins in new markets and regions. Its diversity in terms of end market, customer and geography, product innovation and engineering expertise provides it with a competitive edge. Underlying customer demand and end-market momentum remain strong across most of its sectors.

Apart from strong demand, earnings growth will be supported by benefits from price realization, growth initiatives and operational excellence initiatives. The stock has appreciated 8.4% over the past three months. Timken continues to pursue strategic acquisitions to broaden its portfolio and capabilities across diverse markets, focusing on bearings, adjacent power transmission products, and related services.

It recently inked a deal to acquire GGB Bearing, which boasts a portfolio of metal-polymer bearings, serving a wide range of industries. This acquisition provides strong synergies and expands Timken’s business by adding products with solid growth prospects. The deal is expected to close in the fourth quarter of 2022 and will be accretive to TKR’s earnings in the first full quarter after its closure.

The Zacks Consensus Estimate for Timken’s current-year earnings has moved up 4.6% over the past 90 days. The figure indicates growth of 25% from the last fiscal year’s reading. TKR has a trailing four-quarter earnings surprise of 15.7%, on average. The stock has an estimated long-term earnings growth rate of 12% and a Zacks Rank #1 (Strong Buy), currently.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Norsk Hydro: Higher all-in metal and alumina prices, and record high results in Extrusions contributed to the solid results in the first three quarters of 2022. Shares of NHYDY have, however, declined 4.8% over the past three months due to the inflationary cost scenario faced by Norsk Hydro.

Nevertheless, NHYDY has been adjusting capacity to meet market demand, and continues focusing on reducing costs and improving operational excellence, which will help drive margins. It continued to progress on Hydro 2025 strategy in the third quarter of 2022, both strengthening its position in low-carbon aluminum and growing in the new energy areas. Greener aluminum with a lower carbon footprint is a key lever for the green transition.

In the third quarter, Norsk Hydro continued seeing higher demand for Hydro CIRCAL and Hydro REDUXA. In the quarter, sales were 45% higher year over year, supporting NHYDY’s target to double the sales of greener products by 2025. Extrusions remain a key growth area in NHYDY’s 2025 strategy and in the third quarter, it decided to invest in 12,000 tons of additional capacity at its extrusions plant in Rackwitz, Germany.

The Zacks Consensus Estimate for Norsk Hydro’s current-year earnings has moved 6.6% north over the past 90 days. The consensus estimate indicates growth of 43% from the prior-year reported figure. NHYDY has an estimated long-term earnings growth rate of 19.2% and a Zacks Rank #3 (Hold), currently.

Northwest Pipe: NWPX’s Engineered Steel Pressure Pipe business has been witnessing solid bidding and a strong backlog for a while. This bodes well for the segment. The Precast business continues to perform well and its order levels are expected to grow in the near term, leading to further margin expansion, backed by a robust precast market. Rising demand for developed water sources and the pressing need to upgrade, repair and replace the aging U.S water and wastewater systems present a huge opportunity for NWPX.

Backed by a strong balance sheet and solid liquidity, Northwest Pipe continues executing its growth strategy. In October 2021, NWPX acquired ParkUSA, a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater and environmental solutions. This marked NWPX’s third major transaction in just more than three years (following Ameron Water Transmission Group and Geneva Pipe and Precast Company). The ParkUSA integration remains on schedule and is steadily contributing to the Precast segment’s performance. The stock has gained 16% over the past three months.

The Zacks Consensus Estimate for Northwest Pipe’s current-year earnings has moved up 5% over the past 90 days. The estimate projects growth of 75.3% from the year-earlier reported number.  NWPX has a trailing four-quarter earnings surprise of 45.8%, on average, and a Zacks Rank of 3, currently.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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