Zacks Industry Outlook Highlights Eaton Corporation, A. O. Smith and EnerSys
For Immediate Release
Chicago, IL – September 29, 2023 – Today, Zacks Equity Research discusses Eaton Corporation plc ETN, A. O. Smith Corp. AOS and EnerSys ENS.
Industry: Electronics
Link: https://www.zacks.com/commentary/2157057/3-manufacturing-electronics-stocks-to-gain-from-improving-supply-chains
While weakness in the manufacturing sector is dampening demand in the Zacks Manufacturing - Electronics industry, recent signs of an uptick in manufacturing activities hold promise. Improving supply chains, deceleration in inflation, focus on digitization and inorganic activities are expected to foster growth of the industry. Resiliency in some prominent end markets bodes well for these companies.
Amid buoyant near-term prospects, companies like Eaton Corporation plc, A. O. Smith Corp. and EnerSys are poised for growth.
About the Industry
The Zacks Manufacturing-Electronics industry comprises companies that manufacture electronic products like battery chargers, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls and motive power devices. Some industry players also provide water-treatment products, engineered flow components, process equipment and turn-key systems. These companies also offer state-of-the-art customer support and after-market services to end users.
These companies are increasing investments in developing innovative technologies, boosting customer and employee experience, as well as supply-chain modernization programs. The manufacturing electronic companies sell products and services in various end markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.
3 Trends Shaping the Future of the Manufacturing Electronics Industry
Persistent Weakness in the Manufacturing Sector: Continued weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management (ISM) report, in August, the Manufacturing PMI (Purchasing Manager's Index) touched 47.6%, contracting for the 10th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. The New Orders Index remained in the contraction territory at 46.8%, declining 0.5 percentage points from the figure recorded in July.
While the manufacturing sector remains in the contraction territory, it is showing signs of gradual improvement. The Manufacturing PMI has been steadily improving over the past few months. In August, the index increased 1.2 percentage points from the figure recorded in July. The uptick in manufacturing activities augurs well for the manufacturing electronics industry.
End-Market Strength: Despite a slowdown in manufacturing activities, demand across key end markets remains stable. Well-diversified end markets, such as gas, mining, refining, energy, renewable, life sciences, metals, electrification and automation, should help industry players offset weakness in demand associated with a single market. Additionally, the digitalization of business operations is helping industry participants boost their competitiveness through enhanced operational productivity, product quality and better cost management. Inorganic growth strategies bode well for the industry's prospects.
Easing Supply-Chain Disruptions: While supply-chain disruptions persist, especially related to the availability of electronic components, the situation has improved, as evident from the ISM report's Supplier Deliveries Index, which reflected faster deliveries for the 11th straight month in August. Easing supply-chain issues should support manufacturing electronics companies' growth in 2023. Additionally, a reduction in raw material costs, thanks to the deceleration in inflation, should aid the bottom line of manufacturing electronics companies.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #83. This rank places it in the top 34% of more than 250 Zacks industries.
The group's Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bullish 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 the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping more faith in this group's earnings growth potential. The industry's earnings estimates for 2023 have increased by 2.4% since the end of March.
Given the upbeat near-term prospects of the industry, we will present a few noteworthy stocks for your consideration. But it is worth looking at the industry's shareholder returns and its current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Manufacturing – Electronics industry has outperformed both the Zacks S&P 500 composite index and the broader sector in the past year.
Over this period, the industry has rallied 28.3% compared with the sector and S&P 500 Index's increase of 19.5% and 17.6%, respectively.
Industry's Current Valuation
On the basis of forward 12-month Price-to-Earnings (P/E), which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 21.36X compared with the S&P 500's 18.30X. It is also above the sector's P/E ratio of 15.33X.
Over the past five years, the industry has traded as high as 27.73X, as low as 13.77X and at the median of 20.66X.
3 Manufacturing - Electronics Stocks to Buy
Each of the stocks mentioned below carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Eaton Corporation plc: Headquartered in Dublin, Ireland, Eaton is a diversified power management company and a global technology leader in electrical components and systems. The company is poised for growth on the back of improving end market conditions, contribution from organic assets and product development initiatives through extensive investments in research and development.
The Zacks Consensus Estimate for Eaton's 2023 earnings has been revised upward by around 4% in the past 60 days. Shares of the company have jumped around 60% in a year.
A. O. Smith: Headquartered in Milwaukee, WI, A. O. Smith is one of the leading manufacturers of commercial and residential water heating equipment and water treatment products in the world. With improving supply chains, higher shipments are expected to drive AOS' growth. Robust demand for commercial and residential boilers and water treatment products within the North America segment is a key catalyst behind this company's growth.
The Zacks Consensus Estimate for A. O. Smith's 2023 earnings has been revised upward by a penny in the past 60 days. Shares of the company have rallied 34.3% in a year.
EnerSys: Headquartered in Pennsylvania, EnerSys engages in manufacturing, marketing and distribution of various industrial batteries. Higher battery volumes in the Americas, solid product offerings and a firm focus on product innovation bode well for this company. The April 2023 acquisition of Industrial Battery and Charger Services Limited bolsters ENS' growth. The buyout has boosted the company's motive power service offerings and strengthened its presence in the UK market.
The Zacks Consensus Estimate for EnerSys' 2023 earnings has been revised upward by approximately 1% in the past 60 days. Shares of the company have soared 58.7% in a year.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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