The Zacks Manufacturing-Electronics industry comprises companies that produce various electronic goods like battery charges, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls, water management products and motive power devices. These businesses also offer customer support and after-market services to end users.
These products and services are offered in various end-markets like robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.
Here are the industry's three major themes:
- We believe U.S. manufacturing companies have been gaining from the government's emphasis on infrastructure development and technological advancement in manufacturing processes. Also, the corporate tax overhaul has created unused corpus that can be used by companies for funding growth projects. In addition to these, the industry is witnessing a surge in e-commerce business, which has opened up opportunities for the companies. Healthy operating conditions in the manufacturing arena are a boon as well.
- U.S. manufacturing companies are currently dealing with a full-blown trade war between the United States and China. Notably, the White House and Beijing have slapped tariffs on goods valuing billions of dollars so far, resulting in tighter trade conditions. We notice that these duties are resulting in material cost inflation and dragging down margins of many companies manufacturing electronic products. A few manufacturers are defying inflation with selling price adjustments. Nonetheless, these changes are making exports expensive and denting overseas revenues of these businesses. Also, a stronger U.S. dollar is currently weighing on the overseas trading arms of these companies.
- Efforts to keep pace with the rising demand for technologically-advanced products are prompting manufacturing companies to invest in innovation. Though such initiatives help in tapping demand from existing and new customers, they often make the players more leveraged, exerting extra burden on margins. Shortage of skilled workforce and high freight costs in the industry as well as dimmed growth prospects of the global economy add to the woes. Moreover, the International Monetary Fund has lowered its growth projection for the global economy by 20 basis points (bps) for 2019. The U.S. economy is now projected to grow 2.3% in 2019, down 20 bps from the previous expectation.
Zacks Industry Rank Indicates Dim Prospects
The Manufacturing-Electronics industry is a 17-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 20% 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 cloudy 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 position in the bottom 50% of the Zacks-ranked industries is a result of disappointing earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have moved roughly 14.5% down.
Before we present a few manufacturing electronics stocks that reflect solid earnings growth prospects, let's take a look at the industry's stock-market performance and valuation picture.
Industry Underperforms S&P 500 & Sector
The Manufacturing – Electronics industry has underperformed the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively declined 13.6%, the S&P 500 registered growth of 10.8% and the Industrial Products sector fell just 4.9%.
One-Year Price Performance
Industry's Current Valuation
EV/EBITDA ratio is one of the commonly used metrics for valuing manufacturing stocks.
The industry's forward 12-month EV/EBITDA ratio is 14.74. This clearly shows that the industry is trading above the S&P 500’s forward 12-month EV/EBITDA ratio of 12.15 and the sector’s 14.31.
Over the past five years, the industry has traded at the highest level of 25.01x forward 12-month EV/EBITDA and the lowest level of 9.81x. The median level, over the same period, was 12.57x.
Manufacturing – Electronics' Valuation Versus Sector
Manufacturing – Electronics' Valuation Versus S&P 500
Demand arising from technological advancements in manufacturing processes is a boon for the industry, while tariffs, inflation, forex woes, high labor and huge freight charges are concerning factors for the players in the manufacturing electronics industry.
We believe that the industry might not be able to tide over the prevailing issues in the near term. Nonetheless, investors might prefer buying or holding some stocks in their portfolio that have bright earnings growth prospects.
Here we discuss in brief four stocks:
UQM Technologies, Inc. (UQM): The stock of this Longmont, CO-based company currently carries a Zacks Rank #2 (Buy). The company’s stock has rallied 46.5% in the past year. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
In the past 30 days, the Zacks Consensus Estimate for the company’s bottom line has remained stable for 2019 and 2020. On a year-over-year basis, the estimates reflect growth of 33.3% for 2019 and 62.5% for 2020.
Price and Consensus: UQM
Schneider Electric S.E. (SBGSY): The stock of this France-based company currently has a Zacks Rank #2. In the past year, the stock price has declined 10.8%, however, growth of approximately 5.9% was witnessed in the past three months.
Earnings estimates have remained stable for 2019 and have increased 1.7% for 2020 in the past 30 days. On a year-over-year basis, estimates reflect growth of 5.5% for 2019 and 7% for 2020.
Eaton Corporation plc (ETN): The stock of this Dublin, Ireland-based company currently carries a Zacks Rank #3 (Hold). The stock has gained 1.6% in the past year.
In the past 30 days, earnings estimates for 2019 have increased 0.5% and that for 2020 rose 0.8%. On a year-over-year basis, the estimates reflect growth of 9.3% for 2019 and 6.3% for 2020.
Price and Consensus: ETN
EnerSys (ENS): The stock of this Reading, PA-based company carries a Zacks Rank #3. In the past year, the company’s stock has declined 18.1%.
In the past 30 days, the Zacks Consensus Estimate for earnings has remained stable for fiscal 2020 (ending March 2020). On a year-over-year basis, the estimate reflects growth of 24%.
Price and Consensus: ENS
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