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4 Top Stocks From the Prospering Manufacturing Electronics Industry

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Zacks Equity Research
·8 min read
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The Zacks Manufacturing - Electronics industry seems to be gaining from consistent improvement in economic activities, technological advancements in manufacturing processes, product innovation and growth in e-commerce business. With the reopening of global economies, the industry is anticipated to gain from growth in domestic and international orders for products.

Industry players like Eaton Corporation plc (ETN), Emerson Electric Co. (EMR), II-VI Incorporated (IIVI) and Regal Beloit Corporation (RBC) are poised to capitalize on the opportunities and benefit from cost-control actions. The optimism surrounding the COVID-19 vaccine and the Federal Reserve’s easing policy to support the pandemic stricken economy 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.

4 Trends Shaping the Future of Manufacturing Electronics Industry

Healthy Orders & Export Demand: The manufacturing electronics industry has been benefiting from consistent rise in the global economic activities. The industry participants have resorted to maintaining the production level per the rise in domestic and international orders for electronic products. Per the Institute for Supply Management’s (“ISM”) report published on Feb 1, the U.S. manufacturing activity expanded for the eighth month in a row in January. The ISM’s manufacturing index was 58.7% in January, a slight decline from 60.5% in the prior month. However, the PMI reading above 50 indicates the expansion of manufacturing activities. In addition, in January, new orders registered 61.1%, marking the eighth consecutive month of increase. Further, new export orders registered 54.9% in the month, up for the seventh consecutive month. This indicates the consistent recovery of economic activities in the sector as more companies are ramping up production with firm orders. In addition, a surge in the e-commerce bu
siness has opened up opportunities for the industry participants.

Technological Advancement: Several electronics manufacturers have been focusing on digitizing their business operations, with the advent of new technologies and business models. Digitization has been allowing businesses to gain detailed insight into their operational performance, demand cycles, delivery status as well as supply-chain issues. This, in turn, has been enabling them to enhance operational productivity, product quality and lower costs, thus, improving competitiveness.

Demand in Electronics Services Market: The growing adoption of the latest manufacturing technologies and processes by original equipment manufacturers has led to increased integration of advanced electronic components into electronic devices. This is likely to continue supporting the electronics manufacturing services market as well. Also, companies like Emerson, which have exposure to the booming medical and life science markets, are experiencing strength across businesses on account of healthy demand for their products and solutions.

Persistent Woes: Despite the positives, some participants from the industry still remain wary of the lingering effects of the coronavirus-related issues on their businesses. Further, several players are facing challenges like the uncertain demand environment owing to the difficult Sino-U.S. trade relations and highly leveraged balance sheets.

Zacks Industry Rank Indicates Strong Prospects

The Manufacturing – Electronics industry belongs to an 18-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #89, which places it in the top 35% 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 2021 have increased 15.6% since the end of May 2020.

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 41.6% compared with the Zacks Industrial Products sector’s growth of 37% and the S&P 500’s rally of 25.4%.

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 25.18. This clearly shows that the industry is trading above the S&P 500’s forward 12-month P/E ratio of 22.01 and the sector’s 22.9.

Over the past five years, the industry has traded at the highest level of 26.24X forward 12-month earnings and lowest level of 13.62X. The median level was 18.03X over the same period.

Manufacturing – Electronics Industry’s Valuation Versus Sector

Manufacturing – Electronics Industry’s Valuation Versus S&P 500

4 Manufacturing - Electronics Stocks Moving Ahead of the Pack

Below, we have discussed four 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.

Eaton Corporation: It is a diversified power management company, and a global technology leader in electrical components and systems. It is likely to benefit from investments in new products, acquisitions, multi-year restructuring program and shareholder-friendly policies in the quarters ahead.

Shares of this Dublin, Ireland-based company have gained 36.1% in the past year. It recorded better-than-expected results in each of the trailing four quarters, with the positive earnings surprise being 13.69%, on average. Also, the company’s earnings estimates have improved 16.3% for 2021 and 15% for 2022 in the past 30 days.

Price and Consensus: ETN

Emerson Electric: The global engineering and technology company is primarily engaged in offering a wide range of products and services to customers in consumer, commercial and industrial markets. It is poised to benefit from strength across its medical, life science, food and beverage, and residential end markets as well as a robust backlog level. Also, it is likely to gain from acquisitions it made over time. Further, it has a policy of rewarding shareholders handsomely.

The stock of this St. Louis, MO-based company has gained 29.5% in the past year. It reported better-than-expected results in each of the last four quarters, with the positive earnings surprise being 21.53%, on average. In the past 30 days, the company’s earnings estimates have moved up 6.3% for fiscal 2021 (ending September 2021) and 4.3% for fiscal 2022 (ending September 2022).

Price and Consensus: EMR

II-VI: Based in Saxonburg, PA, the company engages in designing, manufacturing and marketing optical and opto-electronic components, devices and materials throughout the world. It is well poised to benefit from strength across several end markets including datacom, telecom and wireless communications, along with 5G optical infrastructure buildout. Also, favorable trends across its life sciences, semiconductor capital equipment, and aerospace & defense end markets bode well.

Shares of this company have returned 174.3% in the past year. It reported better-than-expected results in each of the last four quarters, with the positive earnings surprise being 83.68%, on average. In the past 30 days, the company’s earnings estimates have improved 7.1% for fiscal 2021 (ending June 2021) and 6.5% for fiscal 2022 (ending June 2022).

Price and Consensus: IIVI

Regal Beloit: The company is primarily engaged in manufacturing electrical and mechanical motion control products. It is poised to benefit from business-restructuring initiatives, supply-chain efforts and cost-saving measures. 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 68.9% in the past year. It reported better-than-expected results in each of the last four quarters, with the positive earnings surprise being 31.56%, on average. In the past 30 days, the company’s earnings estimates have moved up 2.5% for 2021 and 8.2% for 2022.

Price and Consensus: RBC

+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities

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