The Zacks Electronics - Miscellaneous Components industry comprises an array of companies with diversified end markets. Moreover, apart from the United States, a number of companies in this industry are domiciled in Japan, Germany, the Netherlands and Switzerland.
The industry is benefiting from strong end-market demand, particularly from automotive, portable devices, display (LED & LCD), medical devices and hardware markets. Increasing complexity of electronic products, growing demand for technology in emerging markets and the ongoing development of new solutions for energy generation and conservation are benefiting industry participants.
Products like ceramic and tantalum capacitors, Electro-Magnetic Compatible (EMC) devices, sensors and sensor-based measurement systems and actuators are in huge demand primarily from electronics original equipment manufacturers (OEMs) and electronics manufacturing services (EMS) providers.
However, most of the industry participants have either manufacturing operations in China and South-East Asia or generate significant revenues from this region. Hence, the entire industry is tottering from the ongoing tariff dispute between the United States and China, which has lately escalated on additional levies that may push up commodity prices.
Moreover, the industry participants are exposed to volatility in prices of commodities like tantalum and ceramic powders as well as rare earth elements.
Industry Lags in Terms of Shareholder Returns
Looking at shareholder returns over the past year, it appears that the trade tension between the United States and a number of countries like China and Mexico has been dampening the sentiment of investors in the Electronics - Miscellaneous Components industry.
The Zacks Electronics - Miscellaneous Components 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 climbed 10.6%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 16.3% and 17.3%, respectively.
One-Year Price Performance
Electronics – Miscellaneous Components’ Stocks Trading Cheap
Thanks to the underperformance of the industry over the past year, the Electronics – Miscellaneous Components industry’s valuation looks cheap at the moment. One might get a good handle on the industry’s relative valuation by looking at its price-to-earnings (P/E) ratio, 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 forward 12-month P/E ratio of 11.51, which is below the median level and also the lowest over the past year.
The space also looks inexpensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 17.46 and the median level is 17.58.
Price-to-Earnings Ratio (F12M)
Moreover, a comparison of the group’s P/E ratio with that of its broader sector ensures that the group is trading at a significant discount. The Zacks Computer And Technology Sector’s forward 12-month P/E ratio of 19.96 and the median of 20.04 for the same period are way above the Zacks Electronics – Miscellaneous Components Industry’s respective ratios.
Price-to-Earnings Ratio (F12M)
Improving Earnings Outlook to Drive Outperformance
Despite the escalating trade tensions between the United States and China, we believe the Zacks Electronics – Miscellaneous Components Industry has significant growth prospects due to rising demand for the components in various markets.
Demand for electronic components, interconnect, sensing and control devices remains strong in telecommunications, automotive, transportation, energy harvesting, consumer electronics, military & aerospace, medical, computer, and industrial markets.
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 Electronics - Miscellaneous Components industry’s prospects for a solid price performance going forward 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.
Price and Consensus: Zacks Electronics - Miscellaneous Components
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.
Please note that the $2.28 EPS estimate for the Zacks Electronics - Miscellaneous Components industry for 2018 is not the actual bottom-up EPS estimate for every company in it, but rather an illustrative aggregate created by our proprietary analytics model. The key factor to keep in mind is not the EPS of the industry for 2018, but how this projection has evolved recently.
As you can see here, the $2.28 EPS estimate for 2018 has increased significantly from the end of July. In other words, the sell-side analysts covering the companies in the Zacks Electronics - Miscellaneous Components industry have been proactive in raising their estimates.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Solid Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term.
The Zacks Electronics - Miscellaneous Components industry currently carries a Zacks Industry Rank #31, which places it at the top 12% of more than 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 continuously improved over the past five weeks.
Long-Term Growth Prospects Strong
The long-term (3-5 years) EPS growth estimate for the Zacks Electronics - Miscellaneous Components industry appears promising. The group’s mean estimate of long-term EPS growth rate has increased since February 2016 to reach the current level of 11.32%. This compares to 9.8% for the Zacks S&P 500 composite.
Development of new products and solutions in robotics, industrial automation, alternative and renewable energy systems, hybrid transportation systems, electronic controls for engines and industrial machinery, smart phones and portable devices, GPS navigation, smart and connected (Internet of Things) devices are the key catalysts for the long haul.
Mean Estimate of Long-Term EPS Growth Rate
We believe strong end-market demand for electronic components along with focus on improving manufacturing efficiency bodes well the Zacks Electronics - Miscellaneous Components industry in the near term.
Additionally, cheap valuations make the industry attractive. Investors can build positions in the below-mentioned four stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
AVX Corporation (AVX) – Fountain Inn, SC-based AVX sports a Zacks Rank #1. The stock has returned 10.2% on a year-to-date basis. The consensus EPS estimate for the company has remained steady at $1.29 for fiscal 2019, over the last 30 days.
Price and Consensus: AVX
Kemet Corporation (KEM) - Headquartered in Fort Lauderdale, FL, Kemet also flaunts a Zacks Rank #1. Its shares have returned 37.4% on a year-to-date basis. Moreover, the consensus EPS estimate for the company has remained steady at $2.45 for fiscal 2019, over the last 30 days.
Price and Consensus: KEM
Vishay Precision Group (VPG) - Headquartered in Malvern, PA, this Zacks Rank #1 stock has jumped 54.7% year to date. Moreover, the consensus EPS estimate for the company has remained steady at $1.94 for the current year, over the last 30 days.
Price and Consensus: VPG
CTS Corporation (CTS) - Headquartered in Lisle, IL, this Zacks Rank #2 stock has returned 42.4% on a year-to-date basis. Moreover, the consensus EPS estimate for the company has remained steady at $1.45 for the current year, over the last 30 days.
Price and Consensus: CTS
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