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Computer Peripheral Equipment Industry: Growth Prospects Dim

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Computer Peripheral Equipment Industry: Growth Prospects Dim

The Zacks Computer Peripheral Equipment Industry comprises companies offering LCD panels, smart glass, analog to digital imaging solutions, touch sensors, 3D printers & additive manufacturing and transaction-based printer products, among others.

The industry is highly competitive and characterized by short product life cycles, lengthy product development time-frame, rapidly changing technology and evolving customer demands.

The rising trend of smaller, mobile computing devices coupled with the falling demand for desktop PCs and standalone devices like keyboards and mice have negatively impacted the market for computer peripheral equipment.

Moreover, weakness in core North American and European markets is a headwind. Further, the ongoing trade tension between the United States and China doesn’t bode well for industry participants in the near term. Further, volatility in foreign exchange is a concern.

Industry's Stock Market Performance Lags

Looking at the industry's stock market performance over the past year, it appears that the decline in demand for desktop PCs and related standalone devices has shaken investor confidence in the industry’s prospects.

The Zacks Computer Peripheral Equipment Industry, within the broader Zacks Computer and Technology Sector, has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively lost 21.6% of their value, the Zacks S&P 500 composite and Zacks Computer and Technology Sector have rallied 14.3% and 18.3%, respectively.

Computer Peripheral Equipment Stocks Seem Reasonably Priced

Thanks to the underperformance of the industry over the past year, the Computer Peripheral Equipment industry’s valuation looks reasonable at the moment. One might get a good handle on the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings.

Notably, a lower P/E ratio is always better.

The industry currently has a trailing 12-month P/E ratio of 14.35X, close to the high point for the year, as the chart below shows. 

Moreover, a comparison of the group’s P/E ratio with that of its broader sector shows that the group is trading at a significant discount. The Zacks Computer and Technology Sector’s trailing 12-month P/E ratio of 22.3X for the same period is way above the industry’s ratio.

Improving Earnings Outlook to Drive Outperformance

Strong demand for some peripheral equipment like 3D printers, gaming trappings and headphones are likely to help Computer Peripheral Equipment stocks generate positive shareholder returns in the near future.

However, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance.

This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

The consensus earnings estimate for the Computer Peripheral Equipment industry is pegged at a loss 42 cents. However, it has shown decent improvement since February 2018. Moreover, the trend in earnings estimate revisions is positive, with the industry's aggregate loss estimate narrowing over time.

Zacks Industry Rank Indicates Dim Prospects

The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.

The Computer Peripheral Equipment industry currently carries a Zacks Industry Rank #168, which places it at the bottom 34% of 256 Zacks industries. 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.

Our proprietary Heat Map shows that the industry’s rank has dropped considerably in the past week, after performing well over the previous six weeks.


Decent Long-Term Growth Prospects 

The mean estimate of long-term (3-5 years) EPS growth estimates for the industry has seen a steady fall since March 2018 to reach the current level of 12.87%. However, it is higher than the Zacks S&P 500 composite of 9.8%.

The industry’s long-term growth driven by the growing demand for gaming accessories and 3D printers are expected to be fully offset by the declining popularity of desktops and increasing adoption of portable devices.

Nevertheless, the gradual shift in consumer preference from mobile gaming to a more professional gaming experience is a major growth driver. Launch of advanced gaming devices and growing popularity of e-sports leagues are expected to boost this industry further.

With gaming becoming a lucrative career option and more and more gamers taking it up as a profession, the rising demand for gaming equipment is a major tailwind for the computer peripherals industry.

Further, growing demand for printers with their improved efficiency is a major driving force for the industry. Owing to the usefulness of printers in personal, corporate, architecture and other organizations, the printer market is probably the largest market in the peripherals industry.

These factors are expected to drive top-line growth that has started turning around since the end of 2016, after many years of downtrend

Moreover, another indication of solid long-term prospects is the improvement in the group’s gross margin.

Bottom Line

The Computer Peripheral Equipment industry is to some extent recession-resistant, due to the nature of products of the companies operating in it. Products like printers, headphones, gaming accessories and others are less likely to run out of demand.

The industry is highly competitive and is constantly under pressure to come up with innovative and relevant products which will meet the current demand trend. This involves higher operating cost, which negatively influences the gross margins of the companies belonging to this industry.

Considering the evolving nature of the 3D printing market and the high cost of operations associated with it, we believe that much of the companies’ long-term profitability will depend on efficient cost management.

Further, a slow market growth rate in the near term could weigh on the prospects of the industry. Below is a stock that carries a bearish Zacks Rank that we would recommend investors to stay away from for the time being.

LG Display Co., Ltd. (LPL) – Seoul, Republic of Korea-based LG Display carries a Zacks Rank #4 (Sell). The stock has lost 47.2% over the past year.

However, investors might be better off if they stick to a few peripheral equipment stocks that have a good earnings outlook along with cheap valuation metrics.

Here, is a stock that has witnessed positive earnings estimate revisions and carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Vuzix Corp (VUZI): The Smart-Glasses and Augmented Reality technologies provider has a Zacks Rank #2. The stock has returned 20.5% over the past year.

Below are two stocks from the same space with a Zacks Rank #3 (Hold).

Logitech International (LOGI): The innovative computer peripherals provider has a Zacks Rank #3. The stock has returned 18.8% over the past year.

Stratasys, Ltd. (SSYS): The Minneapolis based 3D printers and materials manufacturer has a Zacks Rank #3. The stock has returned 1.4% on a year-to-date basis.

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