U.S. manufacturing is showing signs of a turnaround despite coronavirus-induced economic devastations. This sector witnessed expansion in the last two months followed by continued uptrend. Notably, emergence of a second wave of coronavirus failed to derail the steady improvement in the sector.
Encouraging U.S. Manufacturing Data
On Aug 3, the Institute for Supply Management (ISM) reported that the U.S. manufacturing purchasing managers' index (PMI) for July was 54.2, its highest reading since March 2019. The consensus estimate was 53.5 for July while June's PMI was 52.6. Notably, any reading above 50 indicates expansion in manufacturing activities.
Moreover, July was the third consecutive month of improvement in manufacturing after the index had slipped to an 11-year low of 41.5% in April. Furthermore, 13 of the 18 industries tracked by ISM expanded in July. Notably, the manufacturing sector accounts for 12% of U.S. GDP.
The ISM reported that manufacturing production jumped to 62.1 in July from 57.3 in June. July's reading was the highest since August 2018, thanks to reopening of more factories. Meanwhile, manufacturing orders climbed to 61.5 in July from 56.4 in June, marking the highest level since September 2019. Employment index rose to 44.2 in July from 42.1 in June. However, the index is still below 50, implying job retrenchment in this sector.
On Aug 3, the IHS Markit reported that its preliminary PMI for the U.S. manufacturing sector rose to 50.9 in July from 49.8 in June.
Positive Developments
Despite the resurgence of the deadly coronavirus in various states, a second round of lockdown will not be imposed. All 50 states have reopened their economies in some form since the last week of May. A series of better-than-expected economic data from June and July, despite the economy seeing way below pre-lockdown levels of activities, have shown fundamental stability of the U.S. economy.
In addition to the United States, the IHS Markit Eurozone manufacturing PMI increased to 51.8 in July from 47.4 in June, marking its highest reading since February 2019. The Caixin/Markit manufacturing PMI for China rose to 52.8 in July from 51.2 in June.
As the U.S. and major global economies reopen, the manufacturing sector should strengthen as export demand for high-tech manufacturing products of the country will likely increase.
Finally, the Fed is likely to keep the benchmark as low as 0-0.25% till 2022. A low interest rate will significantly reduce the cost of capital and make U.S. currency cheaper in the foreign exchange market, making U.S. products more competitively priced.
Our Top Picks
At this stage, we have narrowed down our search to five manufacturing stocks that have rallied in the past month and saw encouraging earnings estimate revision in the past 7 days. This indicates investor optimism over these companies' business potential for the rest of this year. 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.
Chart Industries (NASDAQ:GTLS) Inc. GTLS manufactures and sells engineered equipment and packaged solutions and provides value-add services for the energy and industrial gas industries worldwide. It operates through three segments: Energy & Chemicals, Distribution & Storage Western Hemisphere, and Distribution & Storage Eastern Hemisphere. The Zacks Consensus Estimate for its current-year earnings has moved 4.7% north over the past seven days. The stock price has soared 45.9% in the past month.
Ultra Clean Holdings (NASDAQ:UCTT) Inc. UCTT designs, develops, prototypes, engineers, manufactures, and tests production tools, modules and subsystems for the semiconductor and display capital equipment industries primarily in North America, Asia, and Europe. The Zacks Consensus Estimate for its current-year earnings has risen 9.7% over the past seven days. The stock price has jumped 27.5% in the past month.
Altra Industrial Motion (NASDAQ:AIMC) Corp. AIMC designs, produce, and markets a range of electromechanical power transmission motion control products for use in various motion related applications, and high-volume manufacturing and non-manufacturing processes worldwide. It operates through two segments, Power Transmission Technologies and Automation & Specialty. The Zacks Consensus Estimate for its current-year earnings has climbed 5.7% over the past seven days. The stock price has climbed 12.1% in the past month.
Graco (NYSE:GGG) Inc. GGG designs, manufactures, and markets systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials worldwide. The Zacks Consensus Estimate for its current-year earnings has moved up 1.9% over the past seven days. The stock price has surged 10.8% in the past month.
Tennant Co (NYSE:TNC). TNC designs, manufactures and markets floor cleaning equipment in the Americas, Europe, the Middle East, Africa and the Asia Pacific. It also provides business solutions, such as financing, rental, and leasing programs and machine-to-machine asset management. The Zacks Consensus Estimate for current-year earnings has improved 4.1% over the past seven days. The stock price has gained 5.9% in the past month.
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