The Zacks Laser Systems and Components Industry has been negatively impacted by the ongoing tariff dispute between the United States and China. This is because the industry participants have significant exposure to the fast-growing industrial laser market in China.
The ongoing shift in the U.S. trade policy and the tariff war doesn’t bode well for the industrial market, which is the primary end-market for the Laser Systems and Components industry participants.
The trade war between the United States and China is likely to increase demand for certain components or lead to shortage, thereby rising price. Both the scenarios are expected to negatively impact companies that form the Laser Systems and Components industry.
Moreover, volatility in foreign currency exchange rates against the U.S. dollar is a headwind for the industry participants.
Industry Returns Positive
The ongoing transition from legacy laser solutions to high-powered lasers, particularly for industrial uses, is improving productivity at a lower cost.
Investors’ growing confidence in the industry’s prospects is driven by solid demand and increasing utilization of lasers in verticals like industrial, manufacturing, consumer-electronics, Internet of things (IoT), optics, aerospace & defense and 5G high speed communication.
The Zacks Laser Systems and Components Industry, within the broader Zacks Computer And Technology Sector, has outperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively gained 25.7% over the past year, the Zacks S&P 500 Composite and Zacks Computer and Technology Sector have rallied 14.3% and 18.1% over the same period, respectively.
One-Year Price Performance
The Valuation Picture
The Zacks Laser Systems and Components Industry has mostly growth companies, which call for increased spending on research & development. Sales & marketing costs are also high, thereby denting profits.
However, an increase in revenues indicates the growing demand for the products of these players.
One might therefore get a handle on the industry’s relative valuation by looking at its price-to-sales ratio (P/S), which essentially shows how much an investor is willing to pay for each unit of sales.
Notably, a lower P/S ratio is typically better.
The Zacks Laser Systems and Components industry’s valuation picture has improved relative to the recent past, but still remains above historical levels. The industry currently has a TTM P/S ratio of 5.46X, which represents a premium to the broader market.
The chart below shows the industry's one-year valuation performance relative to the S&P 500 index
Price-to-Sales Ratio (TTM)
Moreover, a comparison of the group’s P/S ratio with that of its broader sector shows that the group is trading at a significant premium. The Zacks Computer And Technology Sector’s TTM P/S ratio of 3.70X and the one-year median level of 3.55X are way below the Zacks Laser Systems and Components industry’s respective ratios.
Price-to-Sales Ratio (TTM)
Earnings Outlook Not So Positive
The ongoing trade tensions between the United States and China and increasing foreign exchange volatility are expected to hurt 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 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 Lasers Systems and 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 current-year $2.54 EPS estimate for the industry is not the actual bottom-up estimate for every company in the Zacks Laser Systems and Components industry, 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 EPS estimate for 2018 has remained steady from the end of June, but declined from $2.75 at the end of March. In other words, the sell-side analysts covering the companies in the Zacks Laser Systems and Components industry have been pessimistic about raising their estimates.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Bleak Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.
The Zacks Laser Systems and Components industry currently carries a Zacks Industry Rank #174, which places it at the bottom 32% 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.
Long-Term Growth Prospects Strong
The long-term (3-5 years) EPS growth estimate for the Zacks Laser Systems and Components industry appears promising. The group’s mean estimate of long-term EPS growth rate of 15.55% is better than 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
The Zacks Laser Systems and Components industry is expected to benefit from emerging applications like additive manufacturing, facial-recognition and gesture recognition and IoT.
Advanced lasers, especially lasers equipped with 3D sensing (3DS) capabilities are shaping the way we interact with technology. 3DS technology is gaining traction as major smartphone makers are looking to equip the technology in their products.
Moreover, going forward, 3D technology is expected to make its way into Smartphone cameras, which enables a wide range of applications. The technology allows users to, create 3D printable objects, control games with body gestures, and help measure objects.
As industries are increasingly adopting automation techniques it would make perfect sense for lasers to be coupled with IoT. This process not only reduces costs in the long run but increases flexibility and reliability manifold by enabling material handling capabilities from different remote sources.
Additionally, strong demand from semiconductor and allied markets, which is seeing an increasing shift toward production of micro and nano devices, is a positive for the Laser Systems and Components industry participants.
These factors are sustain the sweeping growth in the top line since the end of 2014.
A slow market growth rate and looming tensions over a trade war could weigh on the prospects of the Laser Systems and Components industry.
Below is a stock that carries a bearish Zacks Rank that we would recommend investors to stay away from for the time being.
MicroVision (MVIS): Redmond, WA-based MicroVision carries a Zacks Rank #4 (Sell). The stock has lost 52.9% over the past year. The consensus estimate for the company has remained steady at a loss of 32 cents per share for the current year, over the last 30 days.
Price and Consensus: MVIS
Below are two stocks from the same space with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
IPG Photonics (IPGP): Oxford, MA-based IPG Photonics stock has returned 57.3% in the past year. The consensus EPS estimate for the company has remained steady at $8.48 for the current year, over the last 30 days.
Price and Consensus: IPGP
Lumentum Holdings (LITE): Milpitas, CA-based has lost 6.3% over the past year. The consensus estimate for the company has remained steady at $3.53 for the current year, over the last 30 days.
Price and Consensus: LITE
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