The U.S. economy is pivoting into a new path for the year. After briefly jumping into its first expansionary reading in more than a year and a half, the ISM manufacturing PMI index just fell back into contraction for April. However, there is a strong thesis behind a continued expansion in manufacturing — instead of services — for the rest of 2024.
Among the few industries that investors could look into are metals, specifically primary metals and nonmetallic products used in the construction sector. When drilling into these industries, investors will have access to dozens, if not hundreds, of stocks, so here’s a quick selection filter.
Based on slowing U.S. Gross Domestic Product (GDP) figures and a contracting set of PMIs, investors should prioritize stocks expecting double-digit earnings per share (EPS) growth. Names like Alcoa Co. (NYSE: AA), ATI Inc. (NYSE: ATI), and ArcelorMittal (NYSE: MT) fit this criteria.
A Manufacturing Breakout
Analysts at Goldman Sachs projected a breakout in the U.S. manufacturing sector this year, according to the bank’s 2024 macro outlook report. But this breakout is contingent on the Federal Reserve (the Fed) cutting interest rates this year.
Lower rates mean a weaker dollar, making American exports more attractive to foreign nations. February’s PMI reported a 6.4% jump in export orders for the United States. Now, manufacturers need to ramp up production to fulfill these orders, which is why economic value and EPS could grow for the sector.
With recent contractions, the market is waiting for a more precise direction, though some signs remain as clear as ever. In April’s PMI, the commodities that were up in price were mainly aluminum and steel products. This is why investors should look to employment increases and depleting inventories, which indicate current demand and anticipated future demand as hiring sprees prepare the industry for further production. Both requirements are met by the fields under which these chosen stocks operate.
Alcoa’s Customers Are Key
[content-module:CompanyOverview|NYSE:AA]Most of the company’s sales come from the aerospace industry, which is dominated by Boeing Co. (NYSE: BA). Boeing's production issues and recent incidents dampened Alcoa’s price target to $33.5 a share, calling for an 8.8% downside. However, with its $222.4 price target (23.7% upside) and more than 100% expected EPS growth this year, Boeing could be just around the corner from a potential breakout.
Those bold enough to realize what Boeing’s comeback could mean for Alcoa’s demand and what it could do for the stock boldly projected up to 980% EPS growth for 2024. Those at Jefferies Financial Group boosted Alcoa’s price target to $48 a share, or 31% higher than today’s prices.
Tailwinds Favor ATI’s Financials
[content-module:CompanyOverview|NYSE:ATI]Since its products typically end up in the automotive and construction industries, ATI’s future earnings have just as much hype around them. With a projected 23.8% EPS growth for the year, markets are comfortably bidding up this stock against its peers.
Compared to the steel industry, ATI’s 23.4x P/E valuation commands a premium to the average 11.0x valuation today. Being 112% more expensive must carry a justifiable explanation, and it’s all within the same PMI report. Respondents in the primary metals sector said that automobile builds continue at an average production rate but not near maximum outputs. This means automotive production could see much better production rates soon, calling on ATI’s steel products.
This fundamental outlook may be one reason the stock has been bid up to trade at 94% of its 52-week high, giving investors the momentum they need to justify a potential leg higher.
ArcelorMittal’s Buffett Moment
[content-module:CompanyOverview|NYSE:MT]After buying homebuilding stocks like D.R. Horton Inc. (NYSE: DHI), Warren Buffett demonstrated his bullish view about a potential U.S. residential construction breakout. What better way to play lateral value creation than looking into appliances and construction?
Because ArcelorMittal serves the appliances manufacturing supply chain and construction industries, analysts are projecting up to 29.2% EPS growth for that stock this year. More than that, a consensus price target of $31 a share means analysts now see an 18.2% upside from where the stock trades today.
A 29.4x P/E also gives investors that premium characteristic over the steel industry’s 11.0x valuation. Far from a dip, this stock trades at 90% of its 52-week high. Usually, stocks have an excellent reason to trade near 52-week highs and command a higher P/E multiple with them, and double-digit EPS growth to beat an uncertain economy is one of those reasons.
