The coronavirus pandemic-induced supply-chain constraints and end-market volatility across the world have been impacting the Zacks Electronics – Testing Equipment industry adversely for a while. Extended lockdowns in Shanghai have caused further disruptions in the supply chain. In addition, the ongoing Russia-Ukraine conflict and increasing inflationary pressure are weighing heavily on the industry’s prospects.
Nevertheless, AMETEK AME, Fortive FTV and National Instruments NATI are well-poised to benefit from the 5G-related growth opportunities, strengthening automation drive and Industry 4.0. The solid uptake of software-enabled testing instruments and devices remains the silver lining for the industry participants.
The Zacks Electronics – Testing Equipment industry comprises companies offering advanced instruments, electronic testing equipment solutions, thermal management systems, electrical connectors, motors and various test solutions. The major end-markets served by this particular industry are consumer, automobile, industrial, aerospace & defense, healthcare, semiconductors and communications to name a few. The industry players are continuously making technological advancements to gain traction from the manufacturers of semiconductors, vehicles, machinery, smartphones and medical devices, who are constantly increasing their spending on electronic components.
3 Trends Shaping the Future of Electronics - Testing Equipment Industry
Pandemic-Led Disruptions a Headwind: The industry players are reeling under the impact of the coronavirus (COVID-19)-induced macroeconomic woes. The supply-chain challenges due to the ongoing pandemic severely impacted these companies. Production delays remain a major concern too. Moreover, the panoptic impact of the COVID-led crisis has been wreaking havoc on new bookings of the industry players for a while.
5G Prospects Are Key Catalysts: The growing deployment of 5G holds near-term promises for the industry players. Another major positive is an uptick in demand for the 5G test solutions, which are required for 5G deployment. The current coronavirus-triggered work-from-home and learn-from-home waves, steadily bolstering demand for high-speed Internet services globally, bode well for the electronic companies that are enhancing their 5G efforts. The increasing number of high-speed data centers worldwide is another tailwind. Given this upbeat scenario, the industry is anticipated to remain on the growth trajectory, backed by strong efforts to solidify the 5G strength.
Solid Adoption of Motion Control & Test Systems a Positive: The rising utilization of precision motion-control solutions and automatic test systems in motion-control devices and testing products, particularly in the aerospace, automation, medical and military markets, is a boon. The commercial motor vehicles will likely continue buoying demand for vehicle-tracking systems, fleet-management solutions and other private fleet applications, which are part of the industry’s key offerings.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Electronics – Testing Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #188, which places it in the bottom 25% 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 weak 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this industry’s earnings growth potential. Since Feb 28, 2022, the industry’s earnings estimates for the current year have moved down 5.1%.
Before we present a few stocks that you may want to consider for your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Electronics – Testing Equipment Industry has underperformed the Zacks S&P 500 composite and surpassed the broader Zacks Computer and Technology sector over the past year.
The companies in the industry have collectively lost 14.2% compared with the S&P 500 and the broader sector’s decline of 3.3% and 17.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio (P/E), a commonly used multiple for valuing the Electronics – Testing Equipment stocks, the industry is currently trading at 23.89X, higher than the S&P 500’s 18.68X and the sector’s 23.33X.
Over the past five years, the industry has traded as high as 31.87X and as low as 18.87X, with a median of 23.94X as the chart below shows.
Price/Earnings Ratio (F12M)
3 Testing Equipment Stocks to Keep a Close Eye on
National Instruments Corporation: Based in Austin, TX, NATI, the producer of automated test equipment and virtual instrumentation software, is gaining from strengthening design-to-test offerings. An increase in the production ramp of 5G smartphones is acting as its key driver. Additionally, NATI’s strength in electric and autonomous vehicles, wireless communication and new space technology remains a tailwind.
National Instruments currently sports a Zacks Rank #1 (Strong Buy) and remains upbeat about its strengthening software position. Also, NATI’s robust cost-saving strategies are likely to support its financial foothold in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
National Instruments has gained 4.2% in the past year. The Zacks Consensus Estimate for 2022 earnings has been revised 1.5% upward over the past 30 days to $2.04 per share.
Price and Consensus: NATI
AMETEK: This Berwyn, PA-based entity is gaining on solid contributions from the Magnetrol International and Crank Software acquisitions, which are driving growth in its Electronic Instruments segment. Benefits from the Pacific Design Technologies buyout are aiding the Electromechanical segment. Further, rising demand for precision motion control solutions remains a major tailwind.
AME, the manufacturer of electronic appliances and electromechanical devices, remains optimistic about its strong momentum across the defense and medical markets. This presently Zacks Rank #3 (Hold) player’s proper execution of its four core growth strategies, namely operational excellence, global market expansion, investments in product development and acquisitions, is expected to continue aiding its finances in the near term.
The stock has lost 4% in the past year. The Zacks Consensus Estimate for AME’s 2022 earnings has moved 1.5% north over the past 30 days to $5.51 per share.
Price and Consensus: AME
Fortive: This Everett, WA-based entity is benefiting from the strong demand trends for software offerings and their increased orders. A solid momentum across the Fortive Business System tools remains a key catalyst. Another positive is strengthening momentum across Intelligent Operating Solutions, Precision Technologies and Advanced Healthcare Solutions.
The currently Zacks Rank #3 player, a provider of industrial technology and professional instrumentation solutions, has been gaining from its strategic acquisitions for a while. FTV’s ServiceChannel takeover is helping it penetrate the facility and asset lifecycle market rapidly. Also, the buyout of Provation is boosting Fortive’s healthcare segment.
The stock has lost 8% in the past year. The Zacks Consensus Estimate for Fortive’s 2022 earnings has been revised 2% upward over the past 30 days to $3.11 per share.
Price and Consensus: FTV
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