The Zacks Manufacturing - Electronics industry seems to be gaining from steady resumption of business operations, increase in economic activities and product innovation. With the reopening of global economies, the industry is expected to benefit from strong domestic orders from existing and new customers as well as rise in export demand for products.
Industry players like ABB Ltd (ABB), Regal Beloit Corporation (RBC) and Franklin Electric Co., Inc. (FELE) are poised to capitalize on the opportunities and benefit from cost saving initiatives, which should drive margins and profitability. Also, growing adoption of the latest manufacturing technologies and processes bodes well.
About the Industry
The Zacks Manufacturing-Electronics industry comprises companies that manufacture electronic products like battery charges, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls, water management products and motive power devices. Also, the firms offer state-of-the-art customer support and after-market services to end-users.
The manufacturing electronic companies sell products and services in various types of end-markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.
What’s Shaping the Future of Manufacturing Electronics Industry
Strong Domestic Orders & Export Demand: The manufacturing electronics industry has been benefiting from the resumption of the global economic activities as more and more businesses are operating in reconfigured factories. Over the past few months, the industry participants have resorted to maintaining the production level with all safety protocols per the resumption in domestic orders and higher export demand for electronic products. This has been supported by improvement in supply chain and distribution network across the industry. Per the latest Institute for Supply Management’s (“ISM”) report published on Oct 1, the U.S. manufacturing activity expanded for the fifth month in a row in September. The ISM’s manufacturing index was 55.4% in September, a slight decline from 56% in the prior month. However, the PMI reading above 50 indicates the expansion of manufacturing activities. Also, the government’s business friendly policies including the streamlining of business regulations, corporate tax overhaul and higher government spending, have been supporting the electronic product manufacturing companies. In addition, a surge in the e-commerce business has opened up opportunities for several participants of the industry.
Benefits of Technological Advancement: The electronics manufacturers have been banking on technological advancements in manufacturing processes. Several industry players have resorted to digitizing their business operations, with the gradual development of new technologies and business models. The digitization has been enabling businesses to gain detailed insight into their operational performance, supply-chain issues, delivery status and demand cycles. This has enabled businesses to strengthen operational productivity, product quality and reduce costs, thus, improving competitiveness.
Demand in Electronics Services Market: The growing adoption of the latest manufacturing technologies and processes by original equipment manufacturers has increased the requirement for integrating advanced electronic components into electronic devices. This will likely continue supporting the electronics manufacturing services market as well. Also, companies like Emerson Electric Co. (EMR), which have exposure to the booming medical and life science markets, are experiencing strength across their businesses, on account of solid growth in demand for their products and solutions.
Persistent Headwinds: Despite the positives, some industry participants still remain wary of the impact of the coronavirus-related issues on their businesses. Companies, like EnerSys (ENS) have not provided annual guidance, owing to the uncertain environment arising from the pandemic. In addition, several players are facing challenges like the uncertain demand environment created by difficult Sino-U.S. trade relations, highly leveraged balance sheets and unfavorable movements in foreign currency issues.
Zacks Industry Rank Indicates Strong Prospects
The Manufacturing – Electronics industry belongs to a 16-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #66, which places it in the Top 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright 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 improved earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2020 have increased 10.3% since the end of May.
Before we present a few Manufacturing – Electronics stocks, which look promising, it is worth taking a look at the industry’s performance and valuation picture.
Industry Outperforms Sector & the S&P 500
The Zacks Manufacturing – Electronics industry has outperformed its sector and the S&P 500 in the past year. The stocks in the industry have collectively gained 20.8% compared with the Zacks Industrial Products sector’s growth of 16.7% and the S&P 500’s rally of 16.6%.
One-Year Price Performance
Manufacturing – Electronics Industry’s Valuation
Price/Earnings (P/E) ratio is commonly used for valuing manufacturing stocks.
The industry’s forward 12-month P/E ratio is 24.01. This clearly shows that the industry is trading above the S&P 500’s forward 12-month P/E ratio of 22.64 and the sector’s 23.51.
Over the past five years, the industry has traded at the highest level of 24.01X forward 12-month earnings and lowest level of 13.63X. The median level was 17.65X over the same period.
Manufacturing – Electronics Industry’s Valuation Versus Sector
Manufacturing – Electronics Industry’s Valuation Versus S&P 500
3 Manufacturing - Electronics Stocks to Watch Out For
Below, we have discussed three stocks from the industry that have solid growth opportunities despite the prevalent pandemic uncertainties. The stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ABB: The company is a leading manufacturer of electrification, industrial automation, robotics, motion and discrete automation products. It benefits from its state-of-the-art digital offering ABB Ability, technological expertise and strong market presence. Also, organic growth investments and diligent cost-cutting initiatives are likely to be beneficial over time. Notably, the company is on track to deliver about $500 million of annual run-rate cost reductions from the ABB Operating System program in 2021. Moreover, it expects to benefit from strength across some of its end markets, including distribution utilities, semiconductors, logistics, Food & Beverage, e-mobility and rail.
Shares of this Zurich, Switzerland-based company have gained 40.5% in the past year. It recorded better-than-expected results in the last reported quarter, with the positive earnings surprise being 100.00%. Also, the company’s earnings estimates have improved 1.3% for 2020 and 0.9% for 2021 in the past 30 days.
Price and Consensus: ABB
Regal Beloit Corporation: The company is primarily engaged in manufacturing electrical and mechanical motion control products. It is poised to benefit from business-restructuring initiatives, cost-saving measures and supply-chain efforts. Also, improved order trends across its businesses bode well in the quarters ahead. Further, it has a policy of rewarding shareholders handsomely.
The stock of this Beloit, WI-based company has gained 38.5% in the past year. It reported better-than-expected results in each of the last four quarters, with the average positive earnings surprise being 18.91%. In the past 30 days, the company’s earnings estimates have moved up 1.5% for 2020 and 0.9% for 2021.
Price and Consensus: RBC
Franklin Electric: Based in Fort Wayne, IN, the company engages in designing, manufacturing, and distributing water and fuel pumping systems throughout the world. It is well poised to benefit from solid product offerings, improving water systems and distribution business conditions as well as strong liquidity position.
Shares of this company have returned 32.2% in the past year. It reported better-than-expected results thrice in the last four quarters, with the positive average earnings surprise being 7.09%. In the past 30 days, the company’s earnings estimates have improved 2.7% for 2020 and 0.9% for fiscal 2021.
Price and Consensus: FELE
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Regal Beloit Corporation (RBC) : Free Stock Analysis Report
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Emerson Electric Co. (EMR) : Free Stock Analysis Report
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