Zacks Industry Outlook Highlights Woodward, Badger Meter and Thermon Group
For Immediate Release
Chicago, IL – June 23, 2023 – Today, Zacks Equity Research discusses Woodward, Inc. WWD, Badger Meter, Inc. BMI and Thermon Group Holdings, Inc. THR.
Industry: Instruments - Control
Link: https://www.zacks.com/commentary/2111721/3-instruments-stocks-set-to-ride-on-energy-efficiency-thrust
The Zacks Instruments – Control industry is likely to benefit from the increasing demand for state-of-the-art technology for replacing obsolete industrial control systems with automated products. In addition, a focus on energy-efficient production processes and integrated software systems is likely to be conducive to growth.
However, commodity price inflation amid a challenging macroeconomic environment might hurt the process automation and instrumentation market. Nevertheless, Woodward, Inc., Badger Meter, Inc. and Thermon Group Holdings, Inc. are likely to gain from greater emphasis on energy efficiency and cost reduction, thrust on digitized technologies, adoption of industrial automation and optimum resource utilization.
Industry Description
The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems used in a wide range of industries. These companies deliver sophisticated flow measurement, control and communication solutions for air, water and other forms of gas and liquid used for commercial and residential purposes.
The companies offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry. Some industry players offer heating, ventilation and air conditioning products. These include water heaters and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. Few firms provide water reuse products, consisting of drainage and rainwater harvesting solutions.
What's Shaping the Future of Instruments - Control Industry
Industrial Automation Focus Acting as Potential Catalyst: Greater focus on increased adoption of automation across all industry verticals and higher investments in new technologies are expected to drive growth in the long term. North America is expected to continue dominating the market in terms of adopting automation. Rising infrastructural investments in the energy and power sector, increasing demand for organic food and nutritional beverages, and favorable government policies are aiding the growth.
The pharmaceutical industry's process automation and instrumentation market are also growing due to low-cost factors and evolving regulatory environment. Focus on high-quality equipment indicates increasing buyer maturity and willingness to partner with process control industry players.
Depleting Margins: Material cost inflation, resulting from incessant inflationary pressures, has affected margins. Transportation cost is also on the rise. Moreover, high raw material prices due to inflation, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the production schedule of various firms.
While the companies are focused on improving their operating performance, the inability to obtain adequate supplies of raw materials and product parts at favorable prices is likely to hurt their businesses. With firms being unable to pass on the entire increase in raw material prices to customers due to stiff competition, profitability is mostly on the wane.
The companies largely operate in markets that are susceptible to high competitive pressures and are under constant threat by low-cost suppliers, primarily based in China. Due to an international footprint, these firms are further exposed to foreign exchange fluctuations that affect their cash flows. Changes in competitive conditions, including the availability of the latest products and services, the introduction of new distribution channels and changes in OEM and aftermarket pricing, are likely to hamper operations and affect sales.
Soaring Demand for Digitized Technologies: The industry’s growth is largely driven by an emphasis on digitized technologies such as the Industrial Internet of Things (IIoT). The demand for process automation and instrumentation products is likely to benefit from the rise in manufacturing activities in the post-pandemic era.
Moreover, the demand for safety automation systems and multivariable pressure transmitters is likely to provide significant growth opportunities in the long run. The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. So, the rapid adoption of technology across various industries and growing regulation and compliance requirements will continue to be major growth drivers.
In addition, field instruments play a significant role in process control by measuring the key elements such as temperature, pressure, flow and level in process industries such as chemicals, mining and pharmaceuticals. These include transmitters that primarily measure the pressure, flow, temperature, level and humidity of liquids and gases, which are essential for achieving optimum productivity. A differentiated product offering gives greater opportunities for companies to strengthen their market position.
Zacks Industry Rank Indicates Bullish Trends
The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #62, which places it in the top 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is 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 outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few instruments control 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, S&P 500
The Zacks Instruments – Control industry has outperformed the broader Zacks Computer and Technology sector and the S&P 500 composite in the past year.
The industry has gained 34.1% compared with the S&P 500 and sector’s growth of 14.9% and 22.1%, respectively.
Industry's Current Valuation
The Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing instruments control stocks. The industry has a trailing 12-month EV/EBITDA of 12.97X compared with the S&P 500’s 13.24X. It is above the sector’s trailing 12-month EV/EBITDA of 12.26X.
Over the past five years, the industry has traded as high as 17.47X, as low as 6.72X, with a median of 11.92X.
3 Instruments Control Stocks to Watch
Woodward: Headquartered in Fort Collins, CO, Woodward is an independent designer, manufacturer and service provider of energy control and optimization solutions. The company provides a wide array of products for fuel, combustion, fluid, actuation and electronic applications, which serve the commercial aerospace, business jet, military and energy markets. Woodward has been investing significantly in technologies to secure fresh businesses and spending on new manufacturing units and automation equipment to perk up efficiency.
The company plans to shift some of the machine components to its own factories/capable third-party suppliers to reduce cost and lead time and improve quality. The company also plans on investing $10 million to create machine centers that are expected to solve the problem of component shortage. The stock has gained 30.7% in the past year. It has a long-term earnings growth expectation of 13.5%. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Badger Meter: Headquartered in Milwaukee, WI, Badger Meter provides flow measurement, control and communications solutions, serving water and gas utilities, municipalities and industrial customers worldwide. The company’s products measure water, oil, chemicals, and other fluids, and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data.
With its industry-leading ORION Cellular endpoints, along with communication and software technologies, Badger Meter is focused on creating robust digital solutions to operationalize real-time data into actionable insights. Its BEACON software-as-a-service offering facilitates the collection and analysis of data within the distribution network to improve operational awareness. The Zacks Consensus Estimate for current-year earnings for this Zacks Rank #2 stock has been revised 9.2% upward over the past year. The stock has gained 91.2% in the past year.
Thermon: Headquartered in Austin, TX, Thermon provides engineered industrial process heating solutions for process industries worldwide. Its products include air heaters, boilers, controlling and monitoring solutions, heat tracing systems, tank heating systems, thermostats, tubing bundles, enclosure and explosion-proof gas catalytic heaters, gas-fired blowers and gas heating accessories that comprise regulators, valves, mounting brackets and battery cables.
The buyout of Powerblanket has augmented Thermon's exposure to growing industrial and commercial end markets through its freeze protection, temperature control and flow assurance solutions. It has also enabled the company to expand into adjacent product lines and increase access to diversified end markets. The Zacks Consensus Estimate for its current-year earnings has been revised 69.9% upward over the past year. It has a VGM Score of A. This Zacks Rank #2 stock has gained 66.6% in the past year.
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