3 Manufacturing Electronics Stocks to Gain From Improving Supply Chains
The Zacks Manufacturing - Electronics industry is poised for growth on the back of easing supply chain disruptions. A deceleration in inflation should improve the margins of these companies by reducing raw material costs. Despite a slowdown in manufacturing activities, strength across prominent end-markets should help the industry stay afloat.
Companies like ABB Ltd ABB, A. O. Smith Corporation AOS and Energous Corporation WATT are well placed to take advantage of improving supply chains and healthy end-markets.
About the Industry
The Zacks Manufacturing-Electronics industry comprises companies that manufacture electronic products like battery chargers, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls and motive power devices. Some industry players also provide water-treatment products, engineered flow components, process equipment and turn-key systems. These companies also offer state-of-the-art customer support and after-market services to end users. These companies are increasing investments in developing innovative technologies, boosting customer and employee experience as well as supply-chain modernization programs. The manufacturing electronic companies sell products and services in various end markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.
3 Trends Shaping the Future of the Manufacturing Electronics Industry
Slowdown in Manufacturing Activities: The Federal Reserve’s continued monetary policy tightening has been weighing on the manufacturing sector as evident from the Institute for Supply Management’s (ISM) latest report. In March, the Manufacturing Purchasing Manager's Index touched 46.3%, reflecting a contraction in manufacturing activities for the fifth consecutive month. A figure below 50 indicates a contraction in manufacturing activity. The New Orders Index has remained in contraction territory for the past several months. Amid slowdown in manufacturing activities, the industry participants are bracing for a low demand environment in the near term. However, a turnaround in the situation is expected in the second half of 2023 as the U.S. economy remains healthy.
Strength Across Key End-Markets: Despite a slowdown in manufacturing activities, demand across key end-markets is stable. Well-diversified end-markets, such as gas, mining, refining, energy, renewable, life sciences, metals, electrification and automation, should help the industry players offset weakness in demand associated with a single market. Additionally, the digitalization of business operations is helping industry participants boost their competitiveness through enhanced operational productivity, product quality and better cost management. Inorganic growth strategies bode well for the industry’s prospects.
Easing Supply Chain Disruptions: While supply chain disruptions and the resulting shortage of electronic components persist, the situation has improved with delivery lead times decreasing. This acts as a key catalyst for the industry’s growth in 2023. Additionally, an anticipated reduction in raw material costs, thanks to the deceleration in inflation, should aid the bottom line of manufacturing electronics companies.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #35. This rank places it in the top 14% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
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 2023 have increased 1.2% since 2022-end.
Given the upbeat near-term prospects of the industry, we will present a few noteworthy stocks. But it is worth looking at the industry’s shareholder returns and its current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Manufacturing – Electronics industry has outperformed both the Zacks S&P 500 composite index and the broader sector in the past year.
Over this period, the industry has declined 2.6% compared with the sector and S&P 500 Index’s decrease of 5.1% and 7.4%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month Price-to-Earnings (P/E), which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 20.78X compared with the S&P 500’s 18.63X. It is also above the sector’s P/E ratio of 15.7X.
Over the past five years, the industry has traded as high as 26.63X, as low as 13.53X and at the median of 19.67X as the chart below shows.
Price-to-Earnings Ratio
Price-to-Earnings Ratio
3 Manufacturing - Electronics Stocks to Keep a Tab On
Energous: Headquartered in San Jose, CA, Energous is a developer of a disruptive wire-free charging technology. This Zacks Rank #2 (Buy) company’s focus on advancing technology and expanding partnerships should foster growth. WATT’s recent collaboration with LIXIL is aimed at developing a joint solution that removes the need for battery maintenance via reliable and consistent power delivered wirelessly over the air. The company has also partnered with SATO Holdings for developing next-generation smart store applications. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of Energous have declined 58% in the past six months.The Zacks Consensus Estimate for the company’s 2023 earnings has been revised upward by 7% in the past 60 days.
Price and Consensus: WATT
ABB: Headquartered in Zurich, Switzerland, ABB is a leading technology company operating in Europe, the Americas, Asia, the Middle East and Africa. Strength in the flow business, volume recovery in both the short cycle and the systems-related businesses and robust customer activity in the marine & ports, mining and refining and renewables markets bodes well for this Zacks Rank #3 (Hold) company.
The Zacks Consensus Estimate for ABB’s 2023 earnings has been revised upward by 2.5% in the past 60 days. The stock has jumped around 35% in the past six months.
Price and Consensus: ABB
A. O. Smith: Headquartered in Milwaukee, WI, A. O. Smith is one of the leading manufacturers of commercial and residential water heating equipment, and water treatment products of the world. Robust demand for commercial and residential boilers and water treatment products within the North America segment is a key growth driver for this Zacks Rank #3 company.
The Zacks Consensus Estimate for A. O. Smith’s 2023 earnings has been revised upward by nearly 1% in the past 60 days. The stock has surged approximately 41% in the past six months.
Price and Consensus: AOS
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