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Electronics - Measuring Instruments Industry Outlook Appears Dim

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The Zacks Electronics – Measuring Instruments industry comprises companies offering wearables, electronic design, test solutions and equipment, metrology solutions and thermo management products.

The industry players cater to growing demand for electronic devices in major sectors like consumer, automobile, industrial, aerospace & defense and communications.

In keeping with this, the companies are increasing their spend on research and development as well as sales & marketing in order to stay afloat in an era of technological advancements and changing industry standards. Rising expenditures are in turn marring operational efficiency.

Here are the industry’s three major themes:

  • Rising demand in the consumer sector for connected appliances is acting as a key catalyst. Rapid proliferation of consumer-focused IoT devices like smart speakers and home security solutions are fueling demand for the products offered by industry participants. Further, ongoing technical advancement in the telecommunication sector backed by the emergence of 5G technology and strong efforts toward modification in Internet infrastructure, is acting as a tailwind. Moreover, increasing need for security and surveillance system, and satellites in the aerospace and defense industry are driving the demand for testing solutions.

  • Most of the industry participants serve the semiconductor industry primarily. However, the ongoing trade tensions between the United States and China have created an uncertain environment that is not conducive for investments, particularly by the semiconductor manufacturers. Further, the trade war is acting as a headwind in the industrial automation area. These factors do not bode well for the industry participants as these have significant exposure to China.

  • The fitness and wellness trackers and smart watches are becoming mainstream in the industry and have resulted in accelerated adoption of the flat-panel display (FPD) technology. However, rapid change in the consumer preferences is a headwind as it limits the companies’ ability to cater to shifting consumer demand in a timely manner. Further, the wearable makers in this industry are infusing more resources on R&D in order to synchronize their products with the rapidly changing technologies. These are likely to hurt profitability of the industry participants. Moreover, increasing competitive pressure on these companies from non-traditional wearable makers remains a major concern.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Electronics – Measuring Instruments industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #171, which places it at the bottom 33% 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 blur 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.

We will present a few stocks that are well poised to outperform the market despite this weak backdrop, but it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 & Sector

The Zacks Electronics – Measuring Instruments Industry has outperformed the Zacks S&P 500 composite as well as the broader Zacks Computer and Technology sector in the past year.

The industry has gained 50.9% compared with the S&P 500’s rise of 7.3% and the broader sector’s growth of 8.4%.

One Year Price Performance

Industry’s Current Valuation

On the basis of price-to-sales ratio (P/S), which is a commonly used multiple for valuing Electronics – Measuring Instruments stocks, the industry is currently trading at 3.29X, lower than the S&P 500’s 3.32X and the sector’s 3.81X.

Over the past five years, the industry has traded as high as 5.65X and as low as 1.35X, with the median being at 2.24X, as the charts below show.

Price-to-Sales Ratio (TTM)

Bottom Line

We believe the near-term growth prospects of this industry are bright given increasing spending by manufacturers of semiconductors, automobiles, machineries, mobile phones due to growing proliferation of IoT techniques. Further, emergence of 5G technology holds long-term promise. However, negative impact of trade war between the United States and China are expected to continue hurting the industry.

None of the stocks in the industry carry a Zacks Rank #1 (Strong Buy). However, we are presenting four stocks with a Zacks Rank #3 (Hold) that investors can retain. You can see the complete list of today’s Zacks #1 Rank stocks here.

San Francisco, CA-based Fitbit, Inc. (FIT) specializes in wearable activity tracking devices that record personal data, including the number of steps taken, distance traveled, calories burned, and other wellness related metrics. It delivered an average positive surprise of 155.8% in the trailing four quarters.

Price and Consensus: FIT

Nova Measuring Instruments Ltd. (NVMI) based in Rehovot, Israel offers advanced metrology solutions like monitoring and measurement systems for the semiconductor manufacturing industry. The company delivered an average positive surprise of 27.3% in the trailing four quarters.

Price and Consensus: NVMI

KeySight Technologies Inc. (KEYS) based in Santa Rosa, CA, is a provider of electronic design and test instrumentation systems. The company serves the communication and electronic industries. It delivered an average four-quarter positive earnings surprise of 9.9%.

Price and Consensus: KEYS

Camtek Ltd. (CAMT) is a manufacturer of metrology and inspection equipment. The company offers software solutions to the semiconductor industry that are utilized in advanced packaging, memory, CMOS Image Sensors, MEMS, RF and other segments. It has recorded an average positive earnings surprise of 7.4% in the trailing four quarters.

Price and Consensus: CAMT

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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Nova Measuring Instruments Ltd. (NVMI) : Free Stock Analysis Report
Keysight Technologies Inc. (KEYS) : Free Stock Analysis Report
Fitbit, Inc. (FIT) : Free Stock Analysis Report
Camtek Ltd. (CAMT) : Free Stock Analysis Report
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