Strength across end-markets bode well for the Zacks Manufacturing – Electronics industry. However, there is some softness in demand for electronic products weighed down by the recent slowdown in manufacturing activities. This can be linked to supply chain disruptions and labor shortages. Challenges associated with raw material cost-inflation are added concerns.
In this scenario, pricing actions to counter escalating costs should aid the performance of ABB Ltd. ABB, Emerson Electric Co. EMR, Regal Rexnord Corporation RRX and The LGL Group LGL.
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 te end users. These companies are increasing investments for 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
Supply Chain Constraints: Supply chain constraints, primarily those related to shortage of component parts and labor scarcity, are weighing on the operations of industry participants. Longer lead times due to supply chain restraints are causing delays in customer deliveries, which in turn might hurt companies’ profitability. Raw material cost inflation is an added concern for industry players, which is likely to hamper the bottom-line performance. In order to offset the cost increase and protect margins, companies are resorting to pricing actions.
Softness in Demand: Though manufacturing activity continues to expand, it is increasing at a slower pace, with a decline in new domestic and export orders. This indicates softer demand for electronic products. Per the Institute for Supply Management’s (ISM) latest report, manufacturing PMI (Purchasing Managers’ Index) was 53% in June, down 3.1 percentage points from May. The New Orders Index declined 5.9 percentage points to 49.2% last month and the New Export Orders Index decreased 2.2 percentage points to 50.7%.
Strength Across End-Markets: While there is some softness in demand due to supply chain constraints, strength across several of the manufacturing electronics industry’s end-markets, such as oil and gas, automotive, life sciences, electronics and semiconductor, transportation, defense, commercial, industrial and residential should help the industry stay afloat. Well-diversified end-markets help industry players offset weakness in demand associated with a single market. Additionally, digitalization of business operations is helping industry participants boost their competitiveness through enhanced operational productivity, product quality and better cost management.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #188. This rank places it in the bottom 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates bleak 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group’s 2022 earnings per share has decreased 1.6% since December 2021-end.
Despite the industry’s drab near-term prospects, we will present a few noteworthy stocks. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Outperforms Sector, Lags S&P 500
The Zacks Manufacturing – Electronics industry has outperformed its sector but underperformed the Zacks S&P 500 composite index in the past year.
Over this period, the industry has declined 19.2% compared with the sector and the S&P 500 Index’s decrease of 21.6% and 17.3%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month Price-to-Earnings (P/E) ratio, which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 17.67X compared with the S&P 500’s 16.77X. It is also above the sector’s P/E ratio of 14.24X.
Over the past five years, the industry has traded as high as 26.61X, as low as 13.65X and at the median of 18.92X as the chart below shows.
4 Manufacturing – Electronics Stocks to Keep a Tab On
LGL Group: Recovery in the avionics market and strong defense product shipments are driving the company’s top line. Increase in business volumes is supporting its margin performance. Backed by these tailwinds, shares of the company have gained 29% over the past year.
Headquartered in Orlando, FL, LGL Group designs, manufactures, and markets frequency and spectrum control products globally. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised upward by 27.8% in the past 90 days. LGL carries a Zacks Rank #2 (Buy).
Price and Consensus: LGL
ABB: Strength in the company’s end-markets such as oil and gas, buildings, mining & metals, automotive, marine & ports, renewables, and food and beverage is likely to drive its performance. Growth across short-cycle businesses and improvement in service and process-related businesses should also aid the company. The stock has declined 22% in a year.
Headquartered in Zurich, Switzerland, ABB is a leading technology company. Its products and services can be used in automated manufacturing, providing digital solutions and electrification of industry. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised upward by 3.6% over the past 90 days. ABB carries a Zacks Rank #3 (Hold).
Price and Consensus: ABB
Emerson: The company is benefiting from strength across life sciences, chemical and power end-markets. Recovery in the energy end market and robust backlog level are other tailwinds for EMR. The company’s focus on operational efficiency and cost-control measures is likely to support its margins. The stock lost 15.2% of value in the past year.
Headquartered in St. Louis, MO, Emerson is a diversified global engineering and technology company, which offers a wide range of products and services to customers in consumer, commercial and industrial markets. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised upward by 1.4% in the past 90 days. EMR carries a Zacks Rank #3.
Price and Consensus: EMR
Regal Rexnord: Strength across general industrial, forestry and agriculture end markets is driving the Motion Control Solutions segment’s performance. The November 2021 acquisition of Arrowhead Systems is also fostering growth of the segment. Strong growth in the North America residential HVAC business and pricing actions are aiding the Climate Solutions division. Shares of RRX have declined 7.2% in the past year.
Headquartered in Beloit, WI, Regal Rexnord is a manufacturer of electric motors and electronic controls, power transmission components, air moving products, and specialty electrical components and systems. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised upward by 1.5% in the past 90 days. Regal Rexnord carries a Zacks Rank #3.
Price and Consensus: RRX
5 Stocks Set to Double
Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2021. Previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.