U.S. markets close in 1 hour 37 minutes

Near-Term Outlook Dull for Manufacturing Electronics Stocks

Zacks Equity Research

The Zacks Manufacturing-Electronics industry comprises companies that manufacture various types of electronic products like battery charges, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls, water management products and motive power devices. Also, these firms offer state-of-the-art customer support and after-market services to end users.

The manufacturing electronic companies sell products and services in various types of end-markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.  Some notable firms in the industry are ABB Ltd (ABB), A. O. Smith Corporation (AOS) and EnerSys (ENS).

Here are the three major themes in the industry:

  • Of late, the U.S. manufacturing companies have been benefiting from technological advancement in manufacturing processes and the government's emphasis on infrastructure development. Also, signs of recovery in manufacturing activity as evident from the latest Purchasing Managers’ Index (PMI) reading, bodes well for the industry participants. Per the latest Manufacturing ISM Report published on Feb 1, the PMI for January increased to 50.9%, its highest since July 2019. Notably, the metric showed that manufacturing activities expanded in January after five consecutive months of contraction. In addition, the phase-one trade deal between the United States and China is likely to restore Chinese and global economic growth, which in turn will boost demand for U.S. manufacturing products. We believe the impetus provided by President Trump’s business friendly policies, including corporate tax overhaul, streamline of business regulations and higher government spending will continue to aid the electronic product manufacturing companies.
     
  • Innovation remains one of the major priorities for industry participants as it helps in creating more demand from customers and fend off competition. However, these investments often weaken profitability of the participants and make them more leveraged. Also, uncertain demand environment for manufacturing electronic products caused by increasing geopolitical tensions, Brexit, inflationary pressure and unfavorable movement in foreign currencies are adding to the concerns. In addition, a stronger U.S. dollar is weighing on the overseas trading arms of these companies.
     
  • Electronic manufacturing companies require skilled labor for adopting innovative technologies to boost operational efficacy. However, the businesses are facing continued skilled labor shortage and high wage costs. In addition, shortage of truck drivers is affecting U.S. manufacturing companies. On account of this, the firms are now experiencing supply-side challenges related to elevated freight charges. These setbacks are likely to continue elevating costs and hurting profits of electronic product manufacturing companies in the near term.

Zacks Industry Rank Indicates Bleak Prospects

The Manufacturing – Electronics industry belongs to a 15-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #197, which places it in the bottom 23% 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 discouraging 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. It’s worth noting here that the industry’s earnings estimates for the current year are down roughly 23.9% year over year.

In spite of the grim outlook, we present a few stocks that have strong earnings growth prospects. Before we discuss the stocks, it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms S&P 500 & Outperforms Sector

The Zacks Manufacturing – Electronics industry has underperformed the S&P 500, while outperformed its sector in the past year. The stocks in this industry have collectively gained 15.1% compared with the S&P 500’s rally of 19.7% and the Zacks Industrial Products sector’s increase of 9.3%.

One-Year Price Performance


Manufacturing – Electronics Industry’s Valuation

Price/Earnings (P/E) ratio is commonly used for valuing manufacturing stocks.

The industry’s forward 12-month P/E ratio is 20.09. This clearly shows that the industry is trading above the S&P 500’s forward 12-month P/E ratio of 18.89 and the sector’s 18.06.

Over the past five years, the industry has traded at the highest level of 20.28x forward 12-month earnings and lowest level of 13.71x. The median level, over the same period, was 16.59X.

 

Manufacturing – Electronics Industry’s Valuation Versus Sector



Manufacturing – Electronics Industry’s Valuation Versus S&P 500

Bottom Line

Owing to the prevalent headwinds, we believe that investment in the industry may not be prudent at the moment.

Despite the industry’s poor rank, we present four promising electronic product manufacturing stocks, which possess the potential to sail through the tough market conditions.

SPX FLOW, Inc. (FLOW): The stock of this Charlotte, NC-based company currently carries a Zacks Rank #1 (Strong Buy). The stock has rallied 38% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, the Zacks Consensus Estimate for the company’s bottom line has improved 0.5% for 2020.

Price and Consensus: FLOW

Emerson Electric Co. (EMR): The stock of this St. Louis, MO-based company currently carries a Zacks Rank #2 (Buy). Over the past year, the stock has returned 9.3%.

The Zacks Consensus Estimate for fiscal 2020 (ending Sep 30, 2020) earnings has risen 0.3% in the past 60 days.

Price and Consensus: EMR

Rexnord Corporation (RXN): The stock of this Milwaukee, WI-based company currently carries a Zacks Rank #3 (Hold). The stock has gained 27.3% over the past year.

In the past 60 days, the Zacks Consensus Estimate for fiscal 2020 (ending Mar 31, 2020) earnings has increased 2.1%.

Price and Consensus: RXN

Schneider Electric S.E. (SBGSY): The France-based company carries a Zacks Rank #3. Over the past year, the company’s stock has risen 42.2%.

In the past 60 days, the Zacks Consensus Estimate for 2020 earnings has remained stable at $1.22.

Price: SBGSY

Biggest Tech Breakthrough in a Generation

Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.

A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.

See 8 breakthrough stocks now>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Schneider Electric SE (SBGSY) : Free Stock Analysis Report
 
Rexnord Corporation (RXN) : Free Stock Analysis Report
 
SPX FLOW, Inc. (FLOW) : Free Stock Analysis Report
 
Enersys (ENS) : Free Stock Analysis Report
 
Emerson Electric Co. (EMR) : Free Stock Analysis Report
 
A. O. Smith Corporation (AOS) : Free Stock Analysis Report
 
ABB Ltd (ABB) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.