As recently reported on BRIIGDE (25th June), industrial metals companies have underperformed the market due to weak demand and a drop in commodity prices. This decline is attributed to a combination of deteriorating macroeconomic conditions, slowdowns in the electric vehicle (EV) and broader automotive industries, the property crisis, and manufacturing slowdown in China.

One might presume that this slowdown would extend to the metal fabrication industry. However, contrary to expectations, the metal fabrication industry has outpaced the market over 1- and 2-year horizons on an equal-weight basis, with returns of [63% vs. 30%] and [33% vs. 19%], respectively, while industrial metal companies yielded a double-digit negative spread against the benchmark.

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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A closer look at the returns reveals that the bulk of the performance can be attributed to the top market-cap companies within the industry. Companies such as Mueller Industries Inc., ATI Inc., and Carpenter Technology Corporation have driven this performance, posting triple-digit excess returns over a 2-year period and double-digit excess returns over the benchmark in the past 12 months.

A deep dive into the fundamentals suggests more resilient sales figures for these companies, albeit trending down. While sales growth turned negative for the industrial metals sector in the four quarters ending Q1, it remained positive for the metal fabrication industry.

In most cases, the robustness of the top line can be attributed to unexpected resilience in the aerospace industry, despite the turbulence following Boeing's scandal and supply chain issues. Additionally, the wide range of industries covered (medical, military, aviation, clean energy, appliances, automobile…) ensures diversification.

The ongoing war in Ukraine has increased demand for military equipment, and decades of expertise continuously facilitate the securement of long-term government or corporate contracts. In the case of Mueller Industries, while sales figures reflected the broader sector trends, the bottom line remained robust due to operational excellence.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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Investor confidence has been further boosted by share repurchase plans in some instances. Better-than-expected EPS and revised outlooks have maintained the momentum. Another striking indicator of operational efficiency is the rising net income margin for the aforementioned companies, which remained flat for the broader metal fabrication industry and shrank to one-fourth for industrial metal companies.

Given their coverage of many industries, one could argue that investors’ eagerness reflects the ultimate inflation hedge that these key industry names represent.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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