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April 25 2023

Three Metal Fabrication Stocks to Watch Out For

k999content Blog aluminum, energy, fabrication, pipe, renewable, stock market 0

The demand for metal fabrication faced a major challenge when it was badly hit during the COVID-19 pandemic, and even now the industry has been witnessing deceleration in demand of late due to muted customer spending. There are other headwinds as well, such as a labor crisis, coupled with the ongoing supply-chain issues and persistent shortages of critical materials. While these factors are affecting the fabrication industry’s production output, certain industry players are expected to gain from their cost-management efforts, focus on improving efficiency and investment in automation. This blog will cover three fabrication stocks in this regard and will try to identify what makes these companies stand out from other metal fabrication stocks.

The Timken Company

The company continues to witness new business wins in new markets and regions. Its diversity in terms of end market, customer and geography, product innovation and engineering expertise provides it with a competitive edge. Underlying customer demand and end-market momentum remain strong across most of its sectors. Apart from strong demand, earnings growth will be supported by benefits from price realization, growth initiatives and operational excellence initiatives. Timken continues to pursue strategic acquisitions to broaden its portfolio and capabilities across diverse markets, focusing on bearings and pressure vessels, adjacent power transmission products, and related services. It recently inked a deal to acquire GGB Bearing, which boasts a portfolio of metal-polymer bearings, serving a wide range of industries. This acquisition provides strong synergies and expands Timken’s business by adding products with solid growth outlook.

Norsk Hydro ASA

Higher all-in metal and alumina prices, and record high results in Extrusions contributed to Norsk’s solid results during 2022. Norsk has been adjusting capacity to meet market demand, and continues focusing on reducing costs and improving operational excellence, which will help drive margins. It continued to progress on its Hydro 2025 strategy in the fourth quarter of 2022, both strengthening its position in low-carbon aluminum and growing in the new energy areas. Greener aluminum with a lower carbon footprint is necessary with aluminium tariffs being levied on carbon emissions. In the first quarter of 2023, Norsk’s sales were 45% higher year over year, supporting its target to double the sales of greener products by 2025. Extrusions remain a key growth area in NHYDY’s 2025 strategy and in the third quarter of 2022, it decided to invest in 12,000 tons of additional capacity at its extrusions plant in Rackwitz, Germany.

Northwest Pipe Company

Northwest’s Engineered Steel Pressure Pipe business has been witnessing solid bidding and a strong backlog for a while which bodes well for the segment. The Precast business continues to perform well and its pipe spool fabrication order levels are expected to grow in the near term, leading to further margin expansion, backed by a robust precast market. Rising demand for developed water sources and the pressing need to upgrade, repair and replace the aging U.S water and wastewater systems present a huge opportunity for Northwest. Backed by a strong balance sheet and solid liquidity, Northwest continues executing its growth strategy. In October 2021, it acquired ParkUSA, a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. This marked Northwest’s third major transaction in just more than three years. The ParkUSA integration remains on schedule and is steadily contributing to the Precast segment’s performance.

Closing Call

An interesting observation from the analyses of the three stocks is that there is no single contributor to their rising potential. While Timken has benefited from strategic acquisitions, Norsk has focused on green energy areas and Northwest has a robust steel pipe business which is driving growth. Thus, in the challenging metal fabrication world, it is important to focus on one’s strengths while managing macro and micro economic headwinds – important lessons for other fabrication companies!

March 29 2022

Correlation between oil prices and stock markets – Fact or Fiction?

k999content Blog gasoline, oil price, Russiassia, stock market 0

It is a commonly held view that rising oil prices directly and negatively impact the economy and the stock market. This is because it is generally felt that an increase in oil prices will raise input costs for most businesses and force consumers to spend more money on gasoline, thereby reducing the corporate earnings of other ventures. The opposite should be true when oil prices fall. However, does oil really drive stock prices or is the correlation weaker than it is made out to be? In this blog, the likely divergence of oil prices and stock markets will be further explored.

Oil and Cost of doing business

A drop in fuel prices is presumed to directly lead to lower transportation costs which should leave more disposable income in people’s wallets. Also, since many industrial chemicals are refined from oil, lower oil prices benefit the manufacturing sector including lower costs for mining plant and equipment. However, if a country increases its oil production (e.g., the United States), low oil prices can potentially hurt oil companies and affect domestic oil industry workers. High oil prices add to the cost of doing business and these costs are ultimately passed on to the consumers.

Reasons for Oil not driving Stock Prices

It has been theorized that other price factors in the economy—such as wages, interest rates, industrial metals, plastic and computer technology—can offset changes in energy costs. This can lead to a diminished impact of oil price shocks and hence, capital markets remain insulated to an extent. Another possibility is that corporations have become increasingly sophisticated at reading futures markets and are better able to anticipate shifts in factor prices; a firm should be able to switch production processes to compensate for added fuel costs. Some economists suggest that general stock prices often rise on the expectation of an increase in the quantity of money, which occurs independently of oil prices.

It has also been observed that the oil market is much more positive about the economy, both in the U.S. and globally, than are stock traders. History shows that when that kind of dichotomy exists, oil traders are right more often than not, in part due to that enforced short-term outlook in oil. Stocks are being driven lower by fear of what might happen and oil is being pushed higher by what actually is happening.

Distinction based on Definition

Oil prices are determined by the supply and demand for petroleum-based products. During an economic expansion, prices might rise as a result of increased consumption; they might also fall as a result of increased production. For instance, front end oil futures contracts look no further than a month out. Because of that, crude is being less influenced than stocks by what the Fed may or may not do later this year and, right now, the economy is strong.

On the other hand, stock prices rise and fall based on future corporate earnings reports, intrinsic values, investor risk tolerances and a large number of other factors. Even though stock prices are commonly aggregated and lumped together, it is possible that oil prices affect certain sectors much more dramatically than they affect others.

The Final Word

It stands to reason that oil prices impact stock prices in some sectors, e.g., transportation is strongly correlated with oil prices as the dominant input cost for transportation firms is fuel. However, for other sectors, oil is not likely to have a dominant impact partly because the stock markets function differently compared to the oil market. In light of the Russian invasion of Ukraine, the oil market is more volatile than however – however this may be a golden opportunity to invest in some stocks which are trading low now and which have great potential (irrespective of whether they are dependent on oil prices or not!).