Supply-chain disruptions and end-market dynamics across the world, owing to the pandemic, have affected the Zacks Electronics – Miscellaneous Components industry. Depressed linear markets, growing geo-political tensions and rising inflationary pressure are weighing heavily on the industry’s prospects.
However, nVent Electric NVT, Fabrinet FN and CTS Corporation CTS are well-poised to benefit from the solid adoption of AI and the democratization of IoT techniques, which are transforming robotics, transportation systems, retail and healthcare. The ongoing automation drive and increased spending by manufacturers of semiconductors, automobiles, machinery and mobile phones are other positives for the industry players.
The Zacks Electronics – Miscellaneous Components industry primarily comprises companies providing a wide range of accessories and parts used in electronic products. The industry participants’ offerings include power control and sensor technologies to mitigate equipment damage, testing products for safety and advanced medical solutions. They cater to varied end markets, such as telecommunications, automotive electronics, medical devices, industrial, transportation, energy harvesting, defense and aerospace electronic systems, and consumer electronics. Its customers are mainly original equipment manufacturers, independent electronic component distributors and electronic manufacturing service providers.
4 Trends Shaping the Future of Electronics – Miscellaneous Components Industry
Supply-Chain Disruptions Remain Worrisome: The industry players are reeling under the impacts of the coronavirus-induced macroeconomic woes. Supply chains are still disrupted by the pandemic-led shelter-in-place measures and lockdowns. These disruptions are severely affecting the industry participants. Production delays and the underutilization of manufacturing capacities remain major concerns. The pandemic aggravated the concerns related to the economic downturn, persistently hurting the industry players’ spending patterns and new bookings.
Labor Shortages a Concern: The pandemic-induced labor crisis is affecting the production capacity of electronic companies. The companies are struggling to meet rising demand following the reopening of economies, worker absenteeism and short-term shutdowns. Labor crunch is dampening the industry participants’ prospects by increasing their lead times.
Automation Boom a Tailwind: The requirement for faster, more powerful and energy-efficient electronics is leading to increased automation. The use of control systems, such as computers and robots, as well as information technologies for handling different processes and machinery, is driving the industry. The growing installation of collaborative robots, which add efficiency to production processes by working with production workers, will benefit industry participants. IoT-supported factory automation solutions are other contributing factors. The evolution of smart cars and autonomous vehicles is expected to drive growth for the industry.
Miniaturization Remains a Key Lever: The industry participants are benefiting from the ongoing transition in semiconductor manufacturing technology. Demand for advanced packaging, enabling the miniaturization of electronic products, remains strong. The consistent shift to smaller dimensions, the rapid adoption of new device architectures like FinFET transistors and 3D-NAND, and the increasing utilization of new manufacturing materials to increase transistor and bit density are driving the demand for solutions provided by the industry players.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Electronics – Miscellaneous Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #167, placing it in the bottom 33% 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 bearish 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 pessimistic about this group’s earnings growth potential. Since Dec 31, 2022, the industry’s earnings estimates for the current year have moved 3.5% down.
Despite the gloomy industry outlook, a few stocks have the potential to outperform the market based on a strong earnings outlook. But before we present the top industry picks, it is worth looking at the industry’s shareholder returns and the current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Electronics – Semiconductors industry has outperformed the Zacks S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has lost 10.4% over this period compared with the S&P 500’s decline of 11% and the broader sector’s decrease of 18.6%.
One-Year Price Performance
Industry’s Current Valuation
Based on the forward 12-month price to earnings, a commonly used multiple for valuing electronics – miscellaneous components stocks, the industry is currently trading at 21.25X compared with the S&P 500’s 17.78X and the sector’s 21.36X.
Over the past five years, the industry has traded as high as 25.58X, as low as 14.55X and recorded a median of 18.75X, depicted in the charts below.
Price/Earnings Ratio (F12M)
3 Electronics – Miscellaneous Components Stocks to Buy
Fabrinet: FN offers advanced optical packaging and precision optical, and electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products. It is benefiting from a favorable demand environment. Further, solid momentum across optical communications products is aiding Fabrinet’s financial performance.
The Zacks Rank #1 (Strong Buy) player is likely to remain on the growth trajectory, owing to the rising momentum across optical communications OEM customers. Increasing demand for optical communications components and modules, driven by growing outsourcing production activities to third parties by OEMs, remains a tailwind.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Fabrinet has gained 25.9% in the past year. The Zacks Consensus Estimate for fiscal 2023 earnings has been revised 3.2% upward to $7.71 per share over the past 30 days.
Price and Consensus: FN
nVent Electric: This London, U.K.-based entity has been gaining from portfolio strength, and modular and digital platforms. NVT’s growth, profits and cash strategies remain noteworthy. Strengthening relationships with strategic channel partners are expected to continue benefiting it.
The Zacks Rank #2 (Buy) player, which is a provider of electrical connection and protection solutions, remains optimistic about strong demand for its products and solutions. A solid execution of its strategy across high-growth verticals, product introductions, global expansion and strategic acquisitions are other tailwinds.
nVent Electric has gained 37% in the past year. The Zacks Consensus Estimate for NVT’s 2023 earnings has been revised 2.8% upward to $2.57 per share over the past 30 days.
Price and Consensus: NVT
CTS: The Lisle, IL-based company is well-positioned to keep gaining from solid momentum across premium non-transportation end markets. Disciplined capital allocation and strategic acquisitions bode well. The company’s TEWA Temperature Sensors acquisition, which has bolstered its presence in Europe, is anticipated to keep contributing well to its financial performance in the days ahead.
This Zacks Rank #2 company manufactures sensors, actuators and electronic components and supplies these products to OEMs in the aerospace, communications, defense, industrial, information technology, medical and transportation markets. CTS is expected to continue gaining from its growing traction among new electric vehicle applications.
CTS has gained 27.9% in the past year. The Zacks Consensus Estimate for its 2023 earnings has been revised 2% upward to $2.55 per share over the past 30 days.
Price and Consensus: CTS
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