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Outlook for Electronics Testing Equipment Space Looks Bright

Zacks Equity Research

The Zacks Electronics -Testing Equipment Industry comprises companies offering advanced instruments, electronic testing equipment solutions, thermal management systems, electrical connectors, motors and various test solutions.

The industry is benefiting significantly from the emergence of software-enabled testing instruments and devices. Notably, the digital wave has led to increasing usage of electronic devices in every major sector, namely consumer, automobile, industrial, aerospace & defense, healthcare, semiconductors and communications.

Here are the three major themes in the industry:

  • Rising utilization of precision motion control solutions and automatic test systems in motion control devices and testing products particularly in the aerospace, automation, medical and military end-markets is a major positive. Further, rapid adoption of wireless test solutions is spurring the industry’s growth. Additionally, commercial motor vehicles will continue to boost demand for vehicle tracking systems, fleet management solutions and other private fleet applications which are part of the industry’s key offerings.
  • The industry is benefiting from increasing usage of electrical instruments and software in the interrogation of biological properties of molecules and cells in clinical and medical science research work. Rapid adoption of these solutions is expected to drive growth for industry participants in the healthcare end-market. Additionally, medical devices and pharmaceutical markets hold immense growth opportunities, thanks to the growing usage of electronic equipment. Moreover, strengthening demand for RF test equipment by medical device manufacturers is a tailwind.
  • The rapid adoption of IoT technology and the emergence of 5G technology presents solid growth opportunities for the industry participants. Moreover, the industry is expected to remain on growth trajectory backed by strong efforts made toward the ongoing modification of the Internet infrastructure, IoT supported industrial automation and evolution of smart cars & autonomous vehicle. Further, robust demand for collaborative robots which add efficiency to the production process by working with the production workers will aid growth of the industry.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Electronics – Measuring Instruments industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #105, which places it at the top 41% of 256 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector, Lags S&P

The Zacks Electronics – Testing Equipment Industry has outperformed the broader Zacks Computer and Technology sector but lagged the Zacks S&P 500 composite in the past year.

The stocks in this industry have collectively increased 2% compared with the Zacks S&P 500’s growth of 3% and the Zacks Computer and Technology sector’s loss of 0.5%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio (P/E), which is a commonly used multiple for valuing Electronics – Testing Equipment stocks, the industry is currently trading at 25.32X, higher than the S&P 500’s 17.52X and the sector’s 19.06X.

Over the past five years, the industry has traded as high as 29.49X and as low as 16.68X, recording a median of 23.36X, as the charts below show.

Forward 12-Month Price-to-Earnings (P/E) Ratio

Bottom Line

We believe the near-term growth prospects of this industry are bright driven by continuous spending by manufacturers of semiconductors, automobiles, machineries, smartphones and medical devices.

None of the stocks in the industry carries a Zacks Rank #1 (Strong Buy). However, we are presenting a stock with a Zacks Rank #2 (Buy) that investors may choose to pick. You can see the complete list of today’s Zacks #1 Rank stocks here.

AMETEK, Inc. (AME) based in Berwyn, PA is the manufacturer of electronic appliances and electromechanical devices. The company has recorded average positive earnings surprise of 5.56% in the trailing four quarters.

Price and Consensus: AME

Moreover, below are two stocks with Zacks Rank #3 (Hold) from the same space that investors can retain for the time being.

Teradyne, Inc. (TER) based in North Reading, MA is a leading provider of automated test equipment. It also offers specialized system testing equipment. Notably, the company has delivered average positive earnings surprise of 16.56% in the trailing four quarters.

Price and Consensus: TER

Cognex Corp. (CGNX) based in Natick, MA is involved in designing, development, manufacturing and marketing of machine vision systems. It also offers software, sensors and industrial barcode readers that are utilized in manufacturing automation. The company has average four-quarter positive earnings surprise of 9.82%.

Price and Consensus: CGNX

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Teradyne, Inc. (TER) : Free Stock Analysis Report
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