However, challenges in the manufacturing sector and supply-chain issues have been weighing on the performances of some industry players. PDD Holdings Inc. PDD, 3M Company MMM and Federal Signal Corporation FSS are a few stocks with healthy prospects.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end markets, including oil and gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction, and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines and engineered fluid-process equipment. Industry players also provide related services to a large customer base. A few companies offer services in the agriculture, marine and telecommunications markets, and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and other countries.
Major Trends Shaping the Future of the Diversified Operations Industry
Strength in Aerospace & Defense Markets: The prospects of multi-sector companies are closely linked to the operating conditions of end markets. Some factors that currently favor the industry are strong demand from the defense and governmental sectors, higher exploration activities in the oil and gas industry, and infrastructure development. Industry players with exposure in the commercial aviation markets are poised to gain from healthy growth in air transport flight hours. Also, higher demand for several products and equipment in the medical and life science markets bode well for some industry participants.
Investments in Innovation & Technological Advancements: The industry players’ constant focus on innovation, product upgrades and the development of products to stay competitive in the market should drive growth. With the gradual development of business models and cutting-edge technologies, several industry players have been banking on digitizing their business operations for a while now. Digitization enables industry participants to boost their competitiveness through enhanced operational productivity, product quality and better cost management.
Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been denting demand in the industry. Per the Institute for Supply Management’s (“ISM”) report, the Manufacturing Purchasing Manager’s Index touched 46.8% in July, down from 48.5% in June. A figure less than 50% indicates a contraction in manufacturing activity. After breaking a contraction streak of 16 months by growing in March, the manufacturing sector contracted for the fourth consecutive month in July. Also, the New Orders Index remained in the contraction territory for the fourth consecutive month, registering 47.4% in July.
Supply-Chain Disruptions: Supply-chain disruptions, especially related to the availability of electrical components, have been concerning for the industry participants of late. This is evident from the latest ISM report’s Supplier Deliveries Index, which reflected slower deliveries in July. Supply-chain issues, if not controlled, might hinder growth of diversified operation companies, going forward.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #63. This rank places it in the top 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates robust prospects. 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 top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping more faith in this group's earnings growth potential. The industry’s earnings estimates for the current year have increased 12% in the past year.
Given the bullish near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. However, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags the S&P 500
Over the past year, the Zacks Diversified Operations industry has underperformed the Zacks S&P 500 composite. The industry has risen 14.2% compared with the S&P 500 Index’s 23.8% growth.
One-Year Price Performance
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Industry's Current Valuation
On the basis of forward P/E (F12M), which is a commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 15.57X compared with the S&P 500’s 21.10X.
Over the past five years, the industry has traded as high as 38.01X and as low as 15.11X, with a median of 21.22X, as the chart below shows:
Price-to-Earnings Ratio Versus S&P 500
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3 Diversified Operations Stocks to Buy
Federal Signal: This Oak Brook, IL-based company provides a suite of products and integrated solutions for municipal, governmental and commercial customers. Federal Signal is well-poised to benefit from robust aftermarket demand and strong order intake, supported by an improvement in supply-chain conditions and effective pricing actions.
Shares of this Zacks Rank #1 (Strong Buy) company have jumped 59.7% over the past year. The Zacks Consensus Estimate for 2024 earnings has been revised 5.2% upward over the past 60 days. Its earnings surprise in the last four quarters was 12.3%, on average, surpassing estimates throughout.
Price and Consensus: FSS
PDD Holdings: Based in Dublin, Ireland, it is a multi-national commerce group that operates a portfolio of businesses. PDD Holdings’ strength in its e-commerce business model, driven by solid momentum in its Pinduoduo platform, is a major positive. The platform helps the company to cater to the growing online retail penetration. A wide range of product offerings, which include agricultural produce, apparel, shoes, mother and childcare products, food and beverage, electronic appliances, furniture, and household goods, helps the company attract customers to Pinduduo.
PDD’s earnings estimates have improved 1.2% for 2024 in the past 60 days. Its earnings surprise in the last four quarters was 45.6%, on average, surpassing estimates throughout. Shares of this Zacks Rank #2 (Buy) company have surged 82.1% in the past year.
Price and Consensus: PDD
3M: Headquartered in St. Paul, MN, 3M, together with its subsidiaries, operates as a diversified technology firm. The company is poised to benefit from strength in the Transportation and Electronics segment, driven by strength in the electronics end market. Recovery in the Safety and Industrial segment, aided by improvements in end markets, bodes well. Solid operational execution, restructuring savings and spending discipline are supporting the margin performance.
The Zacks Consensus Estimate for 3M’s 2024 earnings has been revised upward by 1.6% in the past 60 days. It delivered an earnings surprise of 12.6%, on average, beating estimates in the last four quarters. Shares of this Zacks Rank #2 company have gained 23.9% in the past year.
Price and Consensus: MMM
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
