For Immediate Release
Chicago, IL – November 19, 2021 – Today, Zacks Equity Research discusses Metal Fabrication, including GrafTech International Ltd. EAF, Worthington Industries, Inc. WOR and Northwest Pipe Company NWPX.
The Zacks Metal Products – Procurement and Fabrication industry has been reporting strong growth in order levels so far this year, reflecting improving demand in its end-markets since businesses resumed operations. However, the industry is struggling to keep pace with high levels of demand owing to labor shortages and supply issue constraints. High raw material and freight costs remain a headwind. Nevertheless, the industry players including GrafTech, Worthington Industries and Northwest Pipe Co. will gain from the strong demand levels, cost management, focus on improving efficiency and investment in automation.
About the Industry
The Zacks Metal Products – Procurement and Fabrication industry comprises metal processing and fabrication services providers that transform metal into metal parts, machinery, or components used in other industries. Their processes include forging, stamping, bending, forming, and machining used to shape individual pieces of metal, and welding and assembling to join parts.
The common raw materials used by metal fabrication companies include plate metal, formed or expanded metal, tube stock, welding wire or rod, casting, etc. The companies serve 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 Order Levels: The pandemic had weakened demand in several of the industry’s end markets including transportation, mining and industrial early last year as customers had to temporarily idle their manufacturing facilities amid the restrictions imposed by the governments globally. Backed by the gradual reopening of businesses, the fabricated metal products industry has come out of that slump as evident from growth in new orders, production and backlog levels since July last year.
Per the Fed’s latest industrial production report, aggregate production of fabricated metal products in the United States has been up 3.3% in the third quarter of 2021, which followed growth of 3.1% and 7.5% in the second quarter and the first quarter, respectively. In October, the industry’s production level improved 4.9% on a year-over-year basis.
Higher Costs & Supply Chain Woes Remain Concerns: The industry has been facing high raw material costs since mid-2020, particularly steel. Steel prices are expected to remain escalated in the fourth quarter of 2021 and in 2022 as well amid improving demand and continued supply constraints.
The industry is currently facing shortage of labor, extended raw-materials lead times and transportation constraints, which are anticipated to persist in the next few quarters. The industry players are thus making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions, which are likely to help sustain margins in this scenario.
Automation, Growth in End-Markets 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 new and innovative products will drive growth in the days ahead. Growth in end-use sectors such as manufacturing, aerospace and automotive is anticipated to drive the metal fabrication market over the next few years. Developing countries hold promise courtesy of rapid industrialization, which will create demand.
Zacks Industry Rank Indicates Dim Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Metal Products – Procurement and Fabrication industry, which is a 13-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #211, which places it at the bottom 17% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past three months, the industry’s earnings estimates for the current year have gone down by 5%.
Despite the bleak near-term prospects, we will present a few Metal Products – Procurement and Fabrication stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector, Lags S&P 500
The Zacks Metal Products – Procurement and Fabrication industry has outperformed its own sector. However, it has underperformed the S&P 500 composite over the past year. Over this period, the industry has gained 22.6% compared with the sector’s growth of 20%. Meanwhile, the Zacks S&P 500 composite has rallied 32.3%.
Industry’s Current Valuation
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Metal Products – Procurement and Fabrication companies, we see that the industry is currently trading at 7.77 compared with the S&P 500’s 14.81 and the Industrial Products sector’s forward 12-month EV/EBITDA of 19.22.
Over the last five years, the industry has traded as high as 20.86 and as low as 5.01, with the median being at 7.91.
3 Metal Products – Procurement and Fabrication Stocks to Keep an Eye On
Worthington: The company is well-poised for growth through its three-tiered strategy — Transformation, Innovation and Acquisitions. The transformation aspect concentrates on making its businesses more capital efficient and profitable. The innovation angle is focused on new product development, while acquisitions help augment product offerings and add higher margin businesses.
It recently acquired some assets of the U.S. BlankLight business of Shiloh Industries, Inc., which broadened the capacity and capabilities of its laser welded products business. It has recently entered into an agreement to acquire Tempel Steel Company that will make WOR a leader in the rapidly growing electrical steel market that includes transformers, machine motors and electric vehicle motors.
The company is building on its capabilities in automation, analytics and advanced technologies, which in turn will help it stay ahead of the curve. Backed by its proactive steps to cut costs and strong demand in end markets, the stock has appreciated 6% year to date.
The Zacks Consensus Estimate for Worthington’s current year earnings has moved up 27% over the past 90 days. The estimate indicates year-over-year growth of 3.5%. The company has a trailing four-quarter earnings surprise of 25.8%, on average. WOR currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Northwest Pipe: It ended the third quarter of 2021 with a backlog of $273 million, including confirmed orders — representing the second highest level on record. The stock has appreciated 3% year to date. Rising demand for developed water s and the pressing need to upgrade, repair and replace an aging U.S water and wastewater systems presents a huge opportunity for the company.
Courtesy of a strong balance sheet and solid liquidity position, Northwest Pipe continues to execute its growth strategy. It recently completed the acquisition of ParkUSA, a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. It is expected to be immediately accretive to the company’s earnings.
The completion of this buyout marks Northwest Pipe’s third major transaction in just over three years. In July 2018, the company acquired Ameron Water Transmission Group, while it acquired Geneva Pipe and Precast Company in January 2020.
The Zacks Consensus Estimate for Northwest Pipe’s current year earnings has moved up 25% over the past 90 days. The company has a trailing four-quarter earnings surprise of 19%, on average. The company currently carries a Zacks Rank #2 (Buy).
GrafTech International: The company is benefiting from strong market demand and rising graphite electrode prices, leading to a 19.8% gain in its year-to-date share price. Graphite electrode prices are expected to rise further in the ongoing quarter and in 2022, supported by continued strength in the global steel market, which bodes well for EAF. The company has been enhancing its capabilities and improving efficiencies across its manufacturing footprint this year, given the strong demand for graphite electrodes.
The company is the only large-scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrode manufacturing. This unique position provides a competitive edge with regard to product quality and cost. GrafTech has a trailing four-quarter earnings surprise of 19.7%, on average. The company currently carries a Zacks Rank #3 (Hold).
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