Despite the uncertain macroeconomic environment, the long-term outlook for the metal industry looks promising. The demand for metals is expected to be driven by the rapid transition toward clean energy across different sectors and economies, investments by the government to build and repair existing infrastructure, etc.
Given this backdrop, investors could consider buying fundamentally strong metal stocks ESAB Corporation (ESAB) and Gibraltar Industries, Inc. (ROCK). Additionally, one could closely watch Freeport-McMoRan Inc. (FCX) for an appropriate entry point.
The metal industry is highly cyclical, but the demand for metals is expected to be strong in the long run due to investments in infrastructure development. Countries are increasingly investing in expanding and upgrading their infrastructure.
The Bipartisan Infrastructure Investment and Jobs Act (IIJA) has allocated $550 billion in new federal spending over the next five years. These investments to improve infrastructure will likely boost the demand for metals. Additionally, the ongoing shift to sustainable options across power generation, automobiles, consumer electronics, battery storage, etc., will drive the demand for a wide range of minerals and metals.
Due to the ongoing transition to clean energy, the market for minerals vital to achieving sustainability standards reached $320 billion last year. The International Energy Agency (IEA) has estimated that the global economy will require six times more minerals and metals in 2040 than today to reach net zero by 2050.
Despite the impressive long-term growth prospects, metal demand is expected to remain subdued in the near term due to the slowing demand from China, where manufacturing has contracted, and the property market has stalled. Liberum analyst Tom Price said, “For the first time in over two decades, China’s materials-intensive growth cycle is unresponsive to government-led macro-support.”
Moreover, with interest rates likely to stay higher for longer, there could be a contraction in metal demand. Furthermore, the militant group Hamas and Israel's clashes will likely cloud the sector’s near-term outlook.
Considering these factors, buying fundamentally strong metal stocks ESAB and ROCK could be wise. Meanwhile, investors could watch FCX for an opportune entry point.
Stocks to Buy:
ESAB Corporation (ESAB)
ESAB engages in formulating, developing, manufacturing, and supplying consumable products and equipment for use in cutting, joining, and automated welding; and control equipment. The company’s equipment ranges from portable welding machines to large, customized automated cutting and welding systems. It also offers a range of software and digital solutions.
On July 12, 2023, ESAB announced that it had entered into a new partnership with GRI Renewable Industries to collaborate on green projects, helping them fulfill their goal of running a sustainable business. The partnership will leverage each company’s expertise in the fabrication and wind power industries to drive initiatives such as the transition to green energy and the reduction of each company’s environmental footprint.
In terms of the trailing-12-month net income margin, ESAB’s 7.83% is 26.4% higher than the 6.19% industry average. Likewise, its 16.87% trailing-12-month EBITDA margin is 24.8% higher than the industry average of 13.52%. Furthermore, the stock’s 7.22% trailing-12-month levered FCF margin is 30% higher than the industry average of 5.56%.
ESAB’s net sales for the second quarter ended June 30, 2023, increased 9% year-over-year to $720.42 million. Its adjusted net income from continuing operations rose 13.2% over the prior year quarter to $78.10 million. Also, its adjusted net income per share came in at $1.28, representing an increase of 12.3% year-over-year. In addition, its adjusted EBITDA increased 19.5% year-over-year to $132.10 million.
Analysts expect ESAB’s EPS and revenue for the quarter ended September 30, 2023, to increase 1.3% and 9% year-over-year to $0.93 and $628.98 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 95% to close the last trading session at $68.63.
ESAB’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Momentum and Sentiment. It is ranked #5 out of 32 stocks in the Industrial – Metals industry. Click here to see the other ratings of ESAB for Growth, Value, Stability, and Quality.
Gibraltar Industries, Inc. (ROCK)
ROCK manufactures and distributes building products for the renewable energy, residential, agtech, and infrastructure markets in North America and Asia. It operates through four segments: Renewables, Residential, Agtech, and Infrastructure.
In terms of the trailing-12-month EBIT margin, ROCK’s 11.08% is 13.7% higher than the 9.74% industry average. Likewise, its 6.56% trailing-12-month net income margin is 5.9% higher than the industry average of 6.19%. Furthermore, the stock’s 1.08x trailing-12-month asset turnover ratio is 32.6% higher than the industry average of 0.81x.
For the fiscal second quarter that ended June 30, 2023, ROCK’s net sales came in at $364.91 million. Its adjusted net income rose 15.2% year-over-year to $36.30 million. Also, its adjusted EPS came in at 1.18, representing an increase of 22.9% year-over-year.
Street expects ROCK’s EPS for the quarter ended September 30, 2023, to increase 6.3% year-over-year to $1.19. Its revenue for the same quarter is expected to increase marginally year-over-year to $391.33 million. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 43.6% to close the last trading session at $65.06.
ROCK’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
Within the same industry, it is ranked #4. It has an A grade for Momentum and Sentiment and a B for Quality. To see the other ratings of ROCK for Growth, Value, and Stability, click here.
Stock to Watch:
Freeport-McMoRan Inc. (FCX)
FCX engages in the mining of mineral properties in North America, South America, and Indonesia. It primarily explores for copper, gold, molybdenum, silver, and other metals, as well as oil and gas. The company’s assets include the Grasberg minerals district in Indonesia; Morenci, Bagdad, Safford, Sierrita, and Miami in Arizona; Tyrone and Chino in New Mexico; and Henderson and Climax in Colorado, Cerro Verde in Peru and El Abra in Chile.
In terms of the trailing-12-month net income margin, FCX’s 9.63% is 48% higher than the 6.51% industry average. Likewise, its 35.35% trailing-12-month EBITDA margin is 108.9% higher than the industry average of 16.92%. Furthermore, the stock’s 19.04% trailing-12-month Capex/Sales is 170.4% higher than the industry average of 7.04%.
On the other hand, FCX’s 1.85% trailing-12-month levered FCF margin is 50% lower than the 3.70% industry average. Likewise, its 0.43x trailing-12-month asset turnover ratio is 40% lower than the 0.72x industry average.
FCX’s revenues for the fiscal second quarter ended June 30, 2023, increased 5.9% year-over-year to $5.74 billion. Its adjusted net income attributable to common stock declined 41.5% year-over-year to $500 million. Also, its adjusted EPS came in at $0.35, representing a decline of 39.7% year-over-year.
For the quarter ended September 30, 2023, FCX’s EPS and revenue are expected to increase 35.8% and 10.8% year-over-year to $0.35 and $5.55 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 24% to close the last trading session at $36.67.
FCX’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.
Within the Industrial - Metals industry, it is ranked #12. It has a C grade for Growth, Value, Momentum, Stability, and Sentiment. Click here to see FCX’s rating for Quality.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
FCX shares fell $0.17 (-0.46%) in premarket trading Monday. Year-to-date, FCX has declined -2.86%, versus a 12.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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