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5 Manufacturing Stocks to Buy Defying Industry Contraction

The U.S. manufacturing segment has been suffering a bloody blow since the beginning of this year. The Institute of Supply Management (ISM) reported that manufacturing PMI (purchasing managers’ index) came in at 47.1. Notably, any reading below 50 indicates a contraction in manufacturing activities.

This marked the fifth consecutive month of contraction in U.S. manufacturing activities after a 30-month of expansion. The sub-indexes for new orders, production and backlog of orders remained below 50. Demand remains weak in the face of a higher interest rate regime adopted by the Fed and concerns about a near-term recession.

However, not all manufacturing industries are suffering from demand shortages. The mining and construction industry and the farm equipment industry are doing well, defying the above-mentioned headwinds. The easing of pandemic-era global supply-chain disruptions would help these two industries going forward.

Strong Demand for Mining and Construction

The intensifying global focus on shifting from fossil fuels to zero emissions will require a large number of commodities, which, in turn, will support demand for mining equipment in the years to come. The U.S. government's plans to increase investment in infrastructure construction, particularly in critical subsectors, such as transportation, water and sewerage, and telecommunications, should support demand in the coming years.

The industry participants are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. Digital transformation aids organizations in boosting productivity and increasing efficiency, reliability and safety, thereby enriching customer satisfaction. With the pressing need to cut carbon emissions, companies worldwide are relying more on autonomous machinery.

Solid Demand for Farm Equipment

Growing demand for food to sustain the farm equipment Industry and the need to replace aging equipment should spur demand for the industry. Farm size has been on the rise in the United States, which calls for more laborers. Given the escalation in labor costs every year, farmers are resorting to equipment to replace labor. Demand for agricultural equipment will continue to be supported by increased global demand for food, both from population growth and an increasing proportion of the population aspiring for better living standards.

Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, industry participants are enhancing investments in launching products equipped with advanced technologies and features to keep up with customers' evolving demands.

Initiatives to advance precision agriculture technology is likely to be a game-changer for the industry players, given its productivity-enhancing and sustainability benefits. Demand continues to grow for popular features, which include automatic guide machines in the field and equipment that plants seeds, and applies chemicals and fertilizers with exceptional accuracy.

Our Top Picks

We have narrowed our search to five stocks from the above-mentioned manufacturing industries. These stocks have strong potential for the rest of 2023 with positive earnings estimate revisions in the last 30 days. Each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past month.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Caterpillar Inc. CAT has seen year-over-year revenue and earnings growth for nine straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of supply chain snarls and cost pressures. We expect the company’s adjusted earnings per share for 2023 to grow 19% and revenues to rise 7%.

The Construction Industries segment of CAT is expected to benefit from the rising construction activities in the United States and other parts of the world. Backed by demand for commodities fueled by the energy-transition trend, a thriving mining sector will aid the Resource Industries segment. Caterpillar’s dividend yield and payout ratio are higher than its peers. A strong liquidity position, investments in expanding services and digital initiatives should help CAT deliver outsized returns.

Caterpillar has an expected revenue and earnings growth rate of 9.5% and 27.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11.8% over the last 30 days.

AGCO Corp. AGCO is gaining from increased sales across most of its businesses due to strong demand. Recent investments are also aiding the company’s growth. Even though AGCO is exposed to headwinds like material and logistic cost inflation, high production costs, and increased operating expenses, these would be offset by higher sales volume and pricing.

These tailwinds should help negate the impacts of foreign currency translation and higher production costs. Strong demand, backed by improving farm income, will aid growth. AGCO’s focus on innovation and automation will also drive margins.

AGCO has an expected revenue and earnings growth rate of 15.1% and 17.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.1% over the last 30 days.

The Manitowoc Co. Inc. MTW has been benefiting from pricing actions and efforts to cut down costs to negate the impact of higher costs and supply chain headwinds. In North America, demand from residential and non-residential construction will support MTW’s top-line growth. The need to replace an ageing fleet will also support demand.

MTW continues to accelerate its investment in new product development programs and innovation, which will drive growth. The aftermarket business continues to perform well and MTW remains focused on growing this business.

Manitowoc has an expected revenue and earnings growth rate of 2.9% and 3.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 29.4% over the last 30 days.

Terex Corp. TEX has been gaining from strong demand and improved volumes. TEX has a solid backlog level, which was $4.1 billion at the end of first quarter 2023. This positions Terex well for improved results in the coming quarters. TEX recently raised its full-year outlook, backed by its solid first-quarter performance.

Even though Terex has been witnessing supply-chain challenges and higher costs, these are expected to be offset by the company’s pricing and cost-saving actions. TEX is meanwhile progressing well on its “Execute, Innovate, Grow" strategy. In sync with this, TEX has been investing in innovative products, digital innovation, the expansion of manufacturing facilities and acquisitions.

Terex has an expected revenue and earnings growth rate of 11.7% and 38%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 21.6% over the last 30 days.

Astec Industries Inc. ASTE is gaining from strong demand and a record backlog, which will likely translate into higher sales in the current year. ASTE is witnessing robust demand across its Infrastructure Solutions and Material Solutions businesses as well as improved parts sales volume. Even though tightness in the labor market, supply chain-related issues and escalating material costs remain headwinds, Astec continues to implement price increase actions to offset these impacts.

ASTE’s OneASTEC business model will also help mitigate supply-chain and logistic disruptions. ASTE is committed to executing its strategic transformation initiative focused on implementing new business strategies and a new operating structure. Acquisitions will also aid growth.

Astec has an expected revenue and earnings growth rate of 9% and more than100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.7% over the last seven days.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The Manitowoc Company, Inc. (MTW) : Free Stock Analysis Report

Caterpillar Inc. (CAT) : Free Stock Analysis Report

Astec Industries, Inc. (ASTE) : Free Stock Analysis Report

Terex Corporation (TEX) : Free Stock Analysis Report

AGCO Corporation (AGCO) : Free Stock Analysis Report

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Zacks Investment Research