Buy 5 Manufacturing Stocks Despite Disappointing November PMI

The U.S. manufacturing sector contracted for the 13th consecutive month in November, following a 28-months of growth. The Institute of Supply Management (ISM) reported that the reading for U.S. manufacturing PMI (purchasing managers’ index) came in at 46.7, in line with the previous month. However, the data was below the consensus estimate of 48.1.

Notably, any reading below 50 indicates a contraction in manufacturing activities. Moreover, major subindexes have contracted. The New Orders Index remained in contraction territory at 48.3%, 2.8% higher than the 45.5% recorded in October. The Production Index reading of 48.5% reflects a 1.9% decrease compared to October’s figure of 50.4%.

However, there are some positive developments too. While supply-chain disruptions persist, especially related to the availability of electronic components, the situation has improved, as evident from the ISM report’s Supplier Deliveries Index. The metric for November was 46.2, 1 5% lower than October’s metric of 47.7.

The industry participants are focused on an acquisition-based growth strategy to expand their network and product offerings. This helps their foray into new markets and solidifies their competitive position. Exposure to various end markets helps industrial manufacturing companies offset risks associated with a single market.

Our Top Picks

We have narrowed our search to five manufacturing stocks with strong potential for 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Moreover, these companies are regular dividend payers. Finally, each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

Image Source: Zacks Investment Research

Emerson Electric Co. EMR has been benefiting from healthy demand across end markets. Strong demand across the process and hybrid markets are driving EMR’s underlying sales. The successive deals to acquire Afag and Flexim spark optimism. Emerson Electric’s $8.2 billion deal to acquire National Instruments holds promise. EMR’s bullish guidance for fiscal 2023 is encouraging.

Emerson Electric has an expected revenue and earnings growth rate of 14.1% and 19.1%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 2.5% over the last 30 days. EMR has a current dividend yield of 2.20%.

A. O. Smith Corp. AOS is one of the leading manufacturers of commercial and residential water heating equipment, and water treatment products of the world. AOS specializes in offering innovative, as well as energy-efficient solutions and products, which are developed and sold on a global platform.

Improving supply chains and robust demand for commercial and residential boilers and water treatment products in North America have benefitted AOS. Higher sales from India support the Rest of the World unit’s performance amid weakness in China.

A.O. Smith has an expected revenue and earnings growth rate of 3.4% and 6%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 3.1% over the last 60 days. AOS has a current dividend yield of 1.62%.

Xylem Inc. XYL has been benefiting from strength across the utilities and industrial water applications end markets, strong industrial demand and improving supply chains. Strong price realization and backlog execution in the U.S. and emerging markets are driving the Applied Water segment.

Synergies from the Evoqua acquisition bolster XYL’s growth. Amid a healthy demand environment and to include contributions from the Evoqua buyout, XYL has raised its 2023 guidance.

Xylem has an expected revenue and earnings growth rate of 15.2% and 8.6%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 1% over the last 30 days. XYL has a current dividend yield of 1.19%.

Eaton Corp. plc ETN will benefit from improving end-market conditions and contribution from its organic assets which will assist it in retaining a strong market position. ETN is expanding via strategic acquisitions and its rising backlog shows strong demand for its products. ETN’s strategy to manufacture in the zone of sale has helped it to cut costs.

Eaton has an expected revenue and earnings growth rate of 6.9% and 10.5%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 2.6% over the last 60 days. ETN has a current dividend yield of 1.45%.

Amcor plc’s AMCR volumes are bearing the brunt of weak consumer demand in the inflationary environment along with customer destocking. AMCR expects this situation to persist in the first half of fiscal 2024 and thus expects volumes to be lower for the period. As the situation normalizes in the second half, volumes are expected to pick up.

AMCR’s pricing actions and cost-saving initiatives undertaken will help negate the impact of low volumes on its results. AMCR’s investments to expand capacity in high-value segments like healthcare, protein, pet food, premium coffee and hot-fill beverage containers, and a focus on innovation and sustainable packaging are likely to drive growth.

Amcor has an expected revenue and earnings growth rate of 3.2% and 6.4%, respectively, for next year (ending June 2025). The Zacks Consensus Estimate for next-year earnings has improved 0.1% over the last 60 days. AMCR has a current dividend yield of 5.21%.

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