The Zacks Electronics - Manufacturing Machinery industry is benefiting from the ongoing transition in semiconductor manufacturing technology.
The persistent shift to smaller dimensions, rapid adoption of new device architectures like FinFET transistors and 3D-NAND, along with increasing utilization of new manufacturing materials to increase transistor and bit density is driving demand for solutions provided by the Electronics - Manufacturing Machinery industry participants.
Semiconductor manufacturers are primarily aiming to maximize manufacturing yields at lower costs. Their target to continuously improve device performance requires faster as well as more powerful and energy efficient semiconductors. This is actually increasing the complexity in semiconductor manufacturing processes that includes depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology and inspection.
The Zacks Electronics - Manufacturing Machinery industry comprises companies that provide a range of solutions to address the entire materials handling system. This includes initial production of process chemistry to transportation and dispensing onto the wafer. Moreover, contamination-free transportation, storage and delivery of materials have gained immense significance in recent times.
Further, the rapid adoption of Internet of Things (IoT) supported factory automation solutions is a key catalyst. The industry participants are benefiting from significant capital investments that semiconductor manufacturers are making on equipment to keep pace with advancements in semiconductor technology.
Additionally, the strong demand for advanced packaging that enables the miniaturization of electronic products is driving growth for companies in the Zacks Electronics - Manufacturing Machinery industry.
Industry Performance Has Room to Run
However, looking at shareholder returns over the past year, it appears that the ongoing trade tension between the United States and China, and growing U.S. protectionism has been dampening sentiment on the Electronics - Manufacturing Machinery industry.
Notably, most of the semiconductor manufacturers are based in China, Korea, Taiwan and Japan.
The Zacks Electronics - Manufacturing Machinery Industry has underperformed the Zacks S&P 500 Composite but outperformed the broader Zacks Computer And Technology Sector over the past year.
While the stocks in this industry have collectively climbed 13.7%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 14.2% and 10.9%, respectively.
One-Year Price Performance
The outperformance can be attributed to the strong demand for solutions that are essential in effectively managing the growing complexity of semiconductor manufacturing.
Electronics - Manufacturing Machinery Stocks Appear Cheap
Since there has been an exponential surge in debt level since 2013, it makes sense to value the industry based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because this valuation metric takes into account the level of debt.
For capital-intensive companies, the EV/EBITDA is a preferable valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
Valuation of the Electronics - Manufacturing Machinery industry is really cheap now. The industry currently has a trailing 12-month EV/EBITDA ratio of 13.63X, which is below the high of 17.19X in the past year and the median level of 15.01X. Clearly, the aggregate valuation picture for the space appears inexpensive.
The space also looks quite cheap when compared with the market at large as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 17.23X and the median level is 18.29X.
EV/EBITDA Ratio (TTM)
Moreover, a comparison of the group’s EV/EBITDA ratio with that of its border sector shows that the Electronics - Manufacturing Machinery industry is trading at a significant discount. The Zacks Computer and Technology Sector’s trailing 12-month EV/EBITDA ratio of 19.78X and the one-year median of 20.48X are way above the group’s respective ratios.
EV/EBITDA Ratio (TTM)
Improving Earnings Outlook to Drive Outperformance
Nevertheless, strong industry fundamentals and expectation of solid top-line growth are likely to generate positive shareholder returns in the near term.
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 - Manufacturing Machinery 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- Manufacturing Machinery
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 $2.12 EPS estimate for the Zacks Electronics - Manufacturing Machinery industry for 2018 is not the actual bottom-up EPS estimate for every company in it, but rather an illustrative aggregate number 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 $2.12 EPS estimate for 2018 has increased from $2.09 at the end of March.
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 - Manufacturing Machinery industry currently carries a Zacks Industry Rank #71, which places it at the top 28% 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.
Long-Term Growth Prospects Strong
The long-term (3-5 years) EPS growth estimate for the Zacks Electronics - Manufacturing Machinery industry appears promising. The group’s current level of 11.86% is better than 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
The Zacks Electronics - Manufacturing Machinery’s long-term growth prospects are alluring. This is because the requirement of faster, more powerful and more energy efficient semiconductors are expected to increase rapidly due to robust adoption of smartphones, cloud computing, IoT and artificial intelligence (AI).
Moreover, emergence of new techniques like wafer level packaging (WLP) is anticipated to increase the need for a contaminant free and high purity manufacturing environment. The rising demand for clean processing as well as wafer carrier cleaning and conditioning tools bodes well for the industry participants in the long haul.
Further, we expect the demand for IoT-based factory automation tools to increase exponentially due to growing need for efficient handling of semiconductor processes.
These factors are expected to drive top-line growth that has gained significant momentum since the end of 2013.
Moreover, another indication of solid long-term prospects is the improvement in the group’s EBITDA margin.
However, surging debt level remains a concern for industry participants.
We believe strong capital spending on advancement of equipments by semiconductor manufacturers is positive for the Zacks Electronics - Manufacturing Machinery industry.
Apart from semiconductor capital equipment market, the solutions of the industry providers are also in high demand in adjacent markets like industrial technologies, life & health sciences, as well as research & defense markets. Further, the fundamental strength is supported by cheap valuation.
Consequently, investors can build positions in the Electronics - Manufacturing Machinery industry based on the above-mentioned factors.
Currently, only couple of stocks in the Zacks Electronics - Manufacturing Machinery industry carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Entegris, Inc (ENTG) - Billerica, MA-based Entegris sports a Zacks Rank #1. The stock has returned 41.2% over the past year. The consensus EPS estimate for the company has increased couple of cents to $1.86 for the current year, over the last 30 days.
Price and Consensus: ENTG
Brooks Automation, Inc. (BRKS) - The company, headquartered in Chelmsford, MA, has a Zacks Rank #2. Its shares have returned 26% over the past year. Moreover, the consensus EPS estimate for the company has remained steady at $1.82 for the current year, over the last 30 days.
Price and Consensus: BRKS
However, there are a number of stocks that investors can hold on to given the positive fundamentals and strong long-term growth prospects of the industry.
MKS Instruments, Inc. (MKSI) - Headquartered in Andover, MA, this Zacks Rank #3 stock has gained 25.9% over the past year. However, the consensus EPS estimate for the company has declined 9 cents to $8.19 for the current year, over the last 30 days.
Price and Consensus: MKSI
Rudolph Technologies, Inc. (RTEC) - Headquartered in Waltham, MA, this Zacks Rank #3 stock has gained 19.5% over the past year. Moreover, the consensus EPS estimate for the company has remained steady at $1.91 for the current year, over the last 30 days.
Price and Consensus: RTEC
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