Metal Fabrication Industry Outlook in 2020


The Zacks Metal Products - Procurement and Fabrication […]

The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers. Most of the industry participants are engaged in conversion, manufacturing and fabrication of metal into end products. Important fabricated metal processes include forging, stamping, bending, forming, and machining. Meanwhile, other processes such as welding and assembling are utilized to join separate parts together.

The industry participants cater to a wide array of markets, including construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronics/electrical components, industrial equipment and general consumer markets.

Let's take a look at the three major themes currently governing the industry:

The industry’s largest material purchases include resins, steel, aluminum, copper, other metals and energy (electricity, natural gas and fuel). Of late, higher material costs, thanks to imposition of tariffs, have been hurting the industry. Nevertheless, some players in the industry have been successful in mitigating cost inflation through price hikes, resourcing to alternate suppliers to secure better pricing or avoid import and transportation costs. However, these measures take time and it might not be always feasible to pass on higher costs to customers, given the competitive environment. This in turn could adversely impact the industry’s margins. Additionally, finding skilled labor is becoming increasingly difficult.

The latest industrial production report of the Fed revealed that aggregate production of fabricated metal products in the United States declined 5.0% in the second quarter of 2019 following growth of 1.6% in the first quarter. Overall production has improved 0.2% in the 12-months ended August 2019. Per the Institute for Supply Management’s latest Manufacturing Report, fabricated metal products reported contraction in September- for the fifth consecutive month due to decline in new orders, production, employment levels and backlog. Overall, the manufacturing sector has witnessed contraction in August and September owing to trade war uncertainties.

Further, the industry’s customer-focused approach to provide cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of new products and innovative products will help in driving growth. According to a report published by Transparency Market Research, the global metal fabrication market is anticipated to see a CAGR of over 3% from 2018 to 2026. Growth is likely to be spurred by the construction sector followed by the automotive sector. The North American market is expected to witness a CAGR of 4% during the said period, fueled by rise in automation and technological upgrades. Developing countries hold promise on account of rapid industrialization, which will create demand.

Zacks Industry Rank Indicates Dismal 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 Metal Products - Procurement and Fabrication industry, which is a 12-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #230, which places it at the bottom 10% 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.

Despite the bleak near-term prospects of the industry, we will present a few Metal Products - Procurement and Fabrication 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 Lags S&P 500 and Sector on Shareholder Returns

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

Over this period, the industry has fallen 22.1% compared with the sector’s decline of 12.4%. Meanwhile, the Zacks S&P 500 composite has dipped 0.5%.