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The Zacks Electronics – Manufacturing Machinery industry is expected to benefit from increased capital spending on high-performance computing, artificial intelligence, advanced packaging and memory by semiconductor manufacturers. The rising need for data center, notebooks (due to coronavirus-induced remote working and learning) and gaming (pandemic-induced demand) are driving memory demand. Axcelis Technologies ACLS, Entegris ENTG and Veeco Instruments VECO are gaining from the above-mentioned trends. These companies provide solutions to semiconductor manufacturers and OEMs. Although weak smartphone demand has been a concern, strength in cloud & data center, healthcare solutions and gaming has been a key catalyst.
The Zacks Electronics – Manufacturing Machinery industry comprises companies that provide a range of solutions to address the needs of wafer processing facilities as well as device packaging and test facilities of semiconductor manufacturing processes. The solutions offered by the industry participants include thin-film processing systems, photonics, process control tools (that perform macro defect inspections and metrology), metal organic chemical vapor deposition, advanced packaging lithography, wet etch and clean, laser annealing, and 3D wafer inspection systems. A few industry participants also offer microcontamination control products and advanced materials handling solutions. Notably, contamination-free transportation, storage and delivery of materials have gained immense significance in recent times.
3 Trends Shaping the Future of the Electronics Industry
Miniaturization Enhances Prospects: Industry participants are benefiting from the ongoing transition in semiconductor manufacturing technology. The demand for advanced packaging that enables the miniaturization of electronic products remains strong. The consistent shift to smaller dimensions and the rapid adoption of new device architecture like FinFET transistors and 3D-NAND, along with increasing utilization of new manufacturing materials to increase transistor and bit density, are driving demand for solutions provided by the industry players. Moreover, the emergence of techniques like wafer level packaging is driving the need for a high-purity manufacturing environment free of contaminants. The rising demand for clean processing as well as wafer carrier cleaning and conditioning tools is a key catalyst for the industry participants.
Complex Process Driving Demand: The requirement of faster, more powerful and more energy-efficient semiconductors is expected to increase rapidly on the robust adoption of cloud computing, IoT and AI. Semiconductor manufacturers like Intel, Samsung, Taiwan Semiconductors are primarily looking to maximize manufacturing yields at lower costs. This is actually making semiconductor manufacturing processes more complex and in turn driving demand for solutions offered by the industry participants. The rapid adoption of IoT-supported factory automation solutions is also a contributing factor. Further, increasing deployment of 5G and the growing demand for edge computing are the key catalysts. However, U.S.-China trade tensions and the impact of coronavirus on consumer appetite for next-gen smartphones and digital cameras are some notable headwinds.
Strong NAND, DRAM & SSD Demand: The improving demand for NAND and DRAM is a positive for the industry participants. Moreover, strong SSD demand driven by data center and cloud spending is a key catalyst. DRAM is also expected to benefit from strong demand in the data center, enterprise and cloud segments. Strong demand for chip and higher spending on semiconductor capital equipment is aiding industry participants.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Electronics – Manufacturing Machinery industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #101, which places it in the top 41% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates robust 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 position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Mar 31, 2021, the industry’s earnings estimate for the current year has increased 25.6%.
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 500
The Zacks Electronics – Manufacturing Machinery industry has outperformed the broader Zacks Computer and Technology sector but lags the S&P 500 composite over the past year.
The industry has risen 9.5% over this period compared with the S&P 500’s rally of 14.5% and the broader sector’s increase of 1.2%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Electronics – Manufacturing Machinery companies, we see that the industry is currently trading at 11.99X compared with the S&P 500’s 14.08X. It is also above the sector’s trailing-12-month EV/EBITDA of 13.60X.
Over the last five years, the industry has traded as high as 17.79X, as low as 10.35X and at the median of 14.20X, as the chart below shows.
EV/EBITDA Ratio (TTM)
3 Electronics Stocks to Buy Right Now
Axcelis Technologies: This Zacks Rank #1 (Strong Buy) company is primarily a producer of ion implantation equipment used to fabricate semiconductor chips in the United States, Europe and Asia. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Beverly, MA, Axcelis is riding on solid capital spending in the implant-intensive mature process technology markets. Strong adoption of the Purion product family has been a catalyst.
Axcelis has been benefiting from a strong China market, driven by robust investments from a large number of domestic customers that serve the mature process technology market. Order momentum is expected to boost Axcelis’s top line in 2022.
The Zacks Consensus Estimate for Axcelis’ 2022 earnings has risen 12.4% to $3.99 per share over the past 30 days.
Price and Consensus: ACLS
Entegris: This Billerica, MA-based company provides microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries.
This Zacks Rank #2 stock is benefiting from solid demand for its leading-edge solutions in advanced technology nodes and the increasing need for end-to-end contamination control solutions. Entegris is riding on strong demand for its leading-edge solutions like liquid filtration, advanced deposition materials and selective edge.
The pending acquisition of CMC Materials is noteworthy. The deal, once completed, will significantly enhance Entegris’ addressable market and clientele. The combined company will have a resilient business model with roughly 80% unit-driven revenues.
The consensus mark for Entegris’ current-year earnings has moved up 7.2% to $4.16 per share over the past 30 days.
Price and Consensus: ENTG
Veeco Instruments: This New York-based company’s ion beam, laser annealing, lithography, MOCVD, and single wafer etch & clean technologies are integral in fabrication and packaging of advanced semiconductor devices.
Veeco is riding on an expanding clientele driven by its innovative product offerings, enhanced service capabilities and increased manufacturing capacity. Veeco exited 2021 with strong order momentum and increased backlog, which should lend investors confidence in its 2022 prospects.
Veeco expects significant growth in 2022, driven by its strong position in laser annealing, EUV mask blank, and AP lithography. The compound semiconductor market is also expected to show significant strength this year, thereby benefiting this Zacks Rank #2 company’s top line.
The Zacks Consensus Estimate for Veeco’s 2022 earnings has been unchanged at $1.57 per share over the past 30 days.
Price and Consensus: VECO
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