U.S. Manufacturing Shrugs Supply Chain Constraints: 5 Picks

Despite starting the year on a positive note, the benchmark stock indexes lost most of their sheen in the last few weeks, thanks to elevated concerns over an impending trade war between the United States and China.

Given the situation, the U.S. manufacturing sector is rife with apprehension regarding the rise in near-term prices of major inputs, skilled labor shortage and an increase in transportation costs.

However, healthy growth drivers like Trump's impetus to foster infrastructure spending, reduced corporate tax rates as well as a rise in new orders and inventories have proved to be the pillars of strength for the industry.

Although month over month performance has dipped this March, we envision that the U.S. manufacturing industry has enough credentials to spring back to its normal activity levels in the next couple of weeks.

Henceforth, allocating your hard-earned money in selective industrial picks should bear fruit.

Supply-Side Restraints Ailing U.S. Manufacturing

Overall anxiety regarding the probable impact of tariff had intensified after the Institute for Supply Management (ISM) polled its March manufacturing numbers. Falling shy of market expectations of 60.1%, the Purchasing Managers' Index (PMI) touched 59.3%, down 1.5 percentage points from the preceding month.

U.S. manufacturers were worried about a trade war, even before Donald President had formally smacked tariffs on steel and aluminum in late March.

The price index for March was 78.1%, up 3.9 percentage points from the previous month, striking the highest level since 2011. “There’s really no reason the price index went up except for the tariff issue” — per one-third of respondents to the ISM’s monthly survey.

Situations worsened when Trump announced his plan to impose tariffs of 25% on imported steel and 10% on aluminum, on Mar 9.

Domestic steelmakers viewed this move as Trump’s initiative to revive the steel and aluminum industry that has been declining over the last few decades. However, manufacturing companies that use these metals as raw materials were hit hard with high price volatility.

Industry players indicated that the tariff notice resulted in panic buying, which in turn raised near-term prices and caused a decline in inventories for non-contract customers. Especially electronic companies, hurt by one side-effect of the tariffs started to hoard steel in the expectation that prices will dramatically increase, going forward.

Additionally, U.S. manufactures are also dealing with other supply-chain issues relating to skilled labor paucity, price upsurges in transportation and delivery delays. Notably, backlogs are building up in the American seaports, as cargos are more closely scrutinized for aluminum and steel content.

Extended lead times and supply constraints have forced some companies to postpone or miss sales deadlines.

Amid Qualms, U.S. Manufacturing Shows Promise

The March PMI reading of higher than 50% verifies that economic activity is booming in the U.S. manufacturing sector. In fact, 17 out of the total 18 manufacturing industries that were surveyed, reported growth in March. This clearly shows that the U.S. industrial sector is progressing steadily.

In February, industrial production made a turnaround after a blink-and-miss activity in January. The Fed’s board of governors stated that industrial production inched up 1.1% in February, as against the decline of 0.3% in the prior month. Also, capacity utilization moved up 0.7% to 78.1 in February, touching the record level since January 2015.

Manufacturing upturn is currently backed by growth in production activity, new orders and inventories, with struggling supply side conditions.

Per March data, ISM’s New Orders Index and Production Index were both above 60%, signifying that production expansion prevailed amid demand-supply glut, along with capacity and labor restraints.

As per an economist at Capital Economics, “the near-term prospects for the manufacturing sector and the broader economy still appear brighter than they have been at any point over the past five years.”

We note that the Industrial Products sector (counting the U.S. manufacturing stocks) is currently placed at the top 6% out of the 16 Zacks sectors.

Per the latest Earnings Preview (dated Apr 6, 2018), earnings and revenues of all the Industrial stocks on the S&P 500 group will climb 23.9% and 12.3%, respectively, year over year, for the January-March quarter.

Improved spending in non-residential construction and residential housing, entry of smarter products and Internet of Things (IoT), rise in new orders, sturdier production activity, heavier inventories and reduced corporate tax rates are anticipated to fuel the sector’s growth going forward.

5 Hot Manufacturing Picks

In order to cash in on the solid growth potential of the industry, we have handpicked five manufacturing stocks that will likely enrich your portfolio.

These companies have a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and delivered a positive average earnings surprise in the last four quarters.

Notably, over the last 60 days, the Zacks Consensus Estimate for earnings for these picks has been revised upward for 2018 and these stocks also showcase positive earnings per share (EPS) growth for 2019.

Let's dig a little deep into these five choices to get a fair idea of their individual skill sets.

Axon Enterprise, Inc. (NASDAQ:AAXN) manufactures and sells conducted electrical weapons globally. It delivered a positive average earnings surprise of 188.33% in the last four quarters. Notably, the Zacks Consensus Estimate for the stock has moved 116.7% north to 39 cents per share for 2018 and its projected EPS growth for 2019 is currently pegged at 74.7%. The company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

ACCO Brands Corporation (NYSE:ACCO) designs, manufactures and sells business and consumer products worldwide. The company holds a Zacks Rank #2. It has delivered a positive average earnings surprise of 82.49% in the last four quarters. Notably, the Zacks Consensus Estimate for the stock has moved north 8.9% to $1.35 per share for 2018 and its projected EPS growth for 2019 is currently pegged at 7.2%.

Alamo Group Inc. (NYSE:ALG) manufactures, services and designs infrastructure and agricultural maintenance equipment services globally. The company carries a Zacks Rank #2. It has delivered a positive average earnings surprise of 12.17% in the last four quarters. Notably, the Zacks Consensus Estimate for the stock has moved up 13.9% to $5.75 per share for 2018 and its projected EPS growth for 2019 is currently pegged at 7%.

Barnes Group Inc. (NYSE:B) is an aerospace and industrial manufacturer as well as service provider in the United States and other overseas markets. The company holds a Zacks Rank #2. It has delivered a positive average earnings surprise of 8.95% in the last four quarters. Notably, the Zacks Consensus Estimate for the stock has been revised 1.3% up to $3.07 per share for 2018 and its projected EPS growth for 2019 is currently pegged at 10.8%.

Dover Corporation (NYSE:DOV) offers specialty systems, software and digital solutions as well as manufacturing equipments globally. The company carries a Zacks Rank #2. It has delivered a positive average earnings surprise of 7.26% in the last four quarters. Notably, the Zacks Consensus Estimate for the stock has moved 1% north to $5.86 per share for 2018 and its projected EPS growth for 2019 is currently pegged at 9.4%.

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