3 Diversified Operations Stocks to Overcome Industry Headwinds

Persistent challenges in the manufacturing sector with tepid orders for products and services have marred the outlook of the Zacks Diversified Operations industry. The lingering effects of supply-chain issues, especially related to the availability of electronic components, have been another concern for industry participants.

The industry is benefiting from the strength across aerospace, defense and oil & gas industries. Healthy demand across medical and life science end markets and growth in the commercial aviation sector have been proving beneficial for the industry. Carlisle Companies Incorporated CSL, Griffon Corporation GFF and ITT Inc. ITT are likely to capitalize on the opportunities.

About the Industry

The Zacks Diversified Operations industry includes companies that operate in various end markets, including oil & 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

Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been denting demand in the industry. Per the Institute for Supply Management report, in April 2024, the Institute for Supply Management's manufacturing index registered 49.2%. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index returned to the contraction territory at 49.1% in April, declining 2.3 percentage points from the figure recorded in March. Also, supply-chain disruptions, particularly related to the availability of electronic components, are a concern for industry participants of late.
Strength in Aerospace and 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 healthy 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 participants' constant focus on innovation, product upgrades and the development of new 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.

Zacks Industry Rank Suggests Bleak Prospects

The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #153. This rank places it in the bottom 39% 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 bleak prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 weak earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are keeping less faith in this group's earnings growth potential. The industry's earnings estimates for the current year have moved down 22% in the past year.

We will present a few stocks that you may want to consider for your portfolio. It is worth taking a look at the industry's shareholder returns and current valuation first.

Industry Lags the S&P 500

In the past year, the Zacks Diversified Operations industry has underperformed the Zacks S&P 500 composite. The industry has increased 3.6% compared with the S&P 500 Index's 29.1% growth.

One-Year Price Performance

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 19.45X compared with the S&P 500's 20.99X.
Over the past five years, the industry has traded as high as 25.47X and as low as 16.30X, with a median of 19.02X, as the chart below shows:

Price-to-Earnings Ratio Versus S&P 500

3 Diversified Operations Stocks to Buy

Carlisle: Based in Scottsdale, AZ, the company engages in manufacturing and providing roofing and waterproofing products, finishing equipment and engineered products. The company is set to gain from strength in the U.S. reroofing end markets along with acquired assets in the quarters ahead. Solid repair and remodel demand across the building envelope in non-residential markets bode well. Contribution from Carlisle Operating System and price realization are supporting its margins.
Shares of the Zacks Rank #1 (Strong Buy) company have skyrocketed 96.5% in the past year. The company delivered better-than-expected results in each of the trailing four quarters, the earnings surprise being 17%, on average. Its earnings estimates have improved 7.6% for 2024 in the past 60 days.

Price and Consensus: CSL

Griffon: The New York-based company is a management and holding company operating through its subsidiaries. Product innovation, specialized household and building products, solid manufacturing capabilities and a surge in the e-commerce business are expected to drive GFF's performance in the quarters ahead.
Shares of this Zacks Rank #2 (Buy) company have soared 106.1% in the past year. It delivered an earnings surprise of 33.5%, on average, beating estimates in each of the last four quarters. In the past 60 days, the company's earnings estimates have increased 4.8% for the fiscal 2024 (ending September 2024).

Price and Consensus: GFF

ITT: Based in New York City, ITT is a global leader in high-technology engineering and manufacturing projects. It engages in the design, manufacture and sale of a wide range of engineered products and services. In the quarters ahead, the company is poised to benefit from strength across its industrial, aerospace and defense end markets and strong operational execution. Growth in component sales within the commercial aerospace and defense markets and strength in the aftermarket business are driving the company's performance.
Shares of this Zacks Rank #2 company have increased 73.5% in the past year. It delivered better-than-expected results thrice and met estimates once in the trailing four quarters, the earnings surprise being 6.5%, on average. The company's earnings estimates have improved 1% for 2024 in the past 60 days.

Price and Consensus: ITT

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