3 Diversified Operations Stocks to Gain on Promising Industry Trends

The Zacks Diversified Operations industry is poised to benefit from strength across aerospace, defense, and oil & gas industries. Growth in the commercial aviation sector and healthy demand across the home and building product markets have been driving the performance of the industry participants. Higher infrastructure development, product innovation efforts and technological advancements in business operations have been acting as other tailwinds.

However, challenges in the manufacturing sector and supply-chain issues have been weighing on the performance of industry players. 3M Company MMM, ITT Inc. ITT and Star Equity Holdings, Inc. STRR are a few stocks that 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

Strength in the Aerospace and Defense Markets: The prospects of multi-sector companies are closely linked to the operating conditions of end markets. Some factors that are currently favoring the industry are robust demand from the aerospace and defense sectors, stability in the oil and gas market and infrastructure development. With commercial and military aircraft programs expected to continue benefiting from strength in air travel and steady government support, industry players with exposure in these markets are poised to maintain strong demand momentum. Also, solid demand for several products and equipment in the consumer & professional, and home & building product markets bodes 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. With digitization, businesses are gaining a detailed insight into their operational performances, demand cycles, delivery status and supply-chain issues. This, in turn, is helping them bolster their competitiveness in the market with enhanced operational productivity, product quality and lower costs.

Softness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been denting the demand in the industry. After witnessing expansion in economic activities for the second consecutive month in February, the manufacturing sector contracted for seven successive months in September. Per the Institute for Supply Management’s (ISM) report, the Manufacturing Purchasing Manager’s Index touched 49.1% in September. A figure less than 50% indicates a contraction in manufacturing activity. Also, the New Orders Index contracted, registering 48.9% in the same month.

Supply-Chain Disruptions: Supply-chain disruptions, especially related to the availability of electrical and electronic components, have been concerning for the industry participants of late. The latest ISM report’s Supplier Deliveries Index reflects slower deliveries for the second straight month in September. Supply-chain issues, if not controlled, might hinder the growth of diversified operation companies going forward.

Zacks Industry Rank Suggests Solid Prospects

The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #88. This rank places it in the top 36% of 243 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 outperform the bottom 50% by a factor of more than two to one.

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 23.5% 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

In the past year, the Zacks Diversified Operations industry has underperformed the S&P 500 composite. The industry has declined 6.7% against the S&P 500 Index’s 16.5% rise.

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 11.15X compared with the S&P 500’s 23.29X.

Over the past five years, the industry has traded as high as 23.49X and as low as 11.15X, with a median of 15.94X, as the chart below shows:

Price-to-Earnings Ratio Versus S&P 500

3 Diversified Operations Stocks Leading the Pack

3M: Based in St. Paul, MN, 3M operates as a diversified technology firm. It has manufacturing operations across the globe and serves a diversified customer base throughout the world. The company stands to gain from strong momentum in the Safety and Industrial segment, driven by strength in personal safety, roofing granules, industrial adhesives and tapes, abrasives and electrical markets. Solid momentum in the electronics, aerospace and defense, personal auto and commercial graphics markets, driven by demand for new products and expanding sales coverage, is proving beneficial for its Transportation and Electronics segment.

Shares of this Zacks Rank #2 (Buy) company have gained 11.3% in the past year. The Zacks Consensus Estimate for 2025 earnings has been revised 0.3% upward over the past 60 days. It beat estimates in each of the last four reported quarters, delivering an average earnings surprise of 4.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: MMM

ITT: Headquartered in Stamford, CT, ITT is a global leader in multiple high-technology engineering and manufacturing industries. The company is poised to benefit from strength in the short-cycle business within the energy and industrial markets. Growth in demand for parts, pumps, services and valves is aiding the segment. Higher component and connector sales within the aerospace and defense markets are also supporting its performance.

The Zacks Rank #2 company’s shares have risen 11.7% in the past year. The Zacks Consensus Estimate for 2025 earnings has inched up 0.3% over the past 60 days. It beat estimates in each of the last four reported quarters, delivering an average earnings surprise of 1.5%.

Price and Consensus: ITT

Star Equity: Headquartered in Old Greenwich, CT, Star Equity is a diversified holding company. Its current structure consists of Building Solutions, Business Services, Energy Services and Investments. STRR is expected to benefit from strength in its Building Solutions division, driven by multiple large commercial projects and a healthy backlog. The Zacks Rank #2 company’s acquisitions of Timber Technologies Solutions and Alliance Drilling Tools are also likely to be accretive to its results in the quarters ahead.

Although the company’s shares have declined in the past year, it has rebounded 17.9% in the past six months. The Zacks Consensus Estimate for 2025 earnings has increased 154.5% over the past 60 days.

Price and Consensus: STRR

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This article originally published on Zacks Investment Research (zacks.com).

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