The Zacks Manufacturing – Electronics industry seems to be benefiting from higher economic activities, product innovation and growth in the e-commerce business. The industry is expected to continue progressing on strong domestic orders and higher export orders for electronics products.
The growing adoption of advanced manufacturing technologies and processes bodes well for the industry participants. Emerson Electric Co. EMR, Regal Rexnord Corporation RRX, Zurn Water Solutions Corporation ZWS and Franklin Electric Co., Inc. FELE are a few industry participants that might capitalize on the prevalent opportunities. Supply-chain issues, inflation in raw materials and labor issues weigh on the companies.
About the Industry
The Zacks Manufacturing-Electronics industry comprises companies that manufacture electronic products like battery charges, 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. In addition, the firms offer state-of-the-art customer support and after-market services to the 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 electronics companies sell products and services in various end markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.
Trends Shaping the Future of Manufacturing Electronics Industry
Strong Domestic Orders & Export Demand: The industry has been gaining from the consistent rise in manufacturing activities, with strong growth in domestic and international orders for electronic products. The ISM’s manufacturing index registered 58.6% in February, indicating expansion of the U.S. manufacturing activity for the 21st month in a row. Also, the metric came higher than the reading of 57.6% in January. The PMI reading above 50 underlines the expansion of manufacturing activities. In February, new orders registered 61.7%, higher than 57.9% in the previous month. Also, new export orders rose to 57.1% from 53.7% in the previous month. ISM’s measure of production in February was 58.5%, marking growth for the 21st successive month. This highlights the trend of healthy economic activities in the sector as companies are scaling up production with bulk orders. A surge in the e-commerce business, particularly amid the COVID-19 pandemic, has also proved beneficial.
Strength in the Electronics Services Market: The electronics manufacturers have been gaining from higher adoption of the advanced manufacturing technologies and processes by original equipment manufacturers. An increase in the requirement for integrating advanced electronic components into electronic devices has supported the electronics manufacturing services market. Also, few industry players with significant exposure to the booming medical and life science markets are witnessing strength across their businesses owing to robust demand for their products and solutions.
Technological Advancement Benefits: With the gradual development of business models and cutting-edge technologies, several industry players have been banking on digitizing their business operations for a while now. Digitization has been enabling several manufacturers to gain detailed insight into their operational performance, demand cycles, supply-chain issues, and delivery status. This is enabling them to bolster their competitiveness in the market with enhanced operational productivity, product quality and lower costs.
Persistent Woes: The industry participants have been experiencing supply-chain disruptions, logistic issues and inflation in raw materials and other expenses, which have been weighing on their margins and profitability. Also, the need for frequent investments to upgrade products and services often hurts the margins and profitability of industry players. The shortage of skilled workers in the United States remains a concern as well.
Zacks Industry Rank Indicates Bright Prospects
The Manufacturing – Electronics industry belongs to a 19-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #92, which places it in the top 37% 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 bright 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 top 50% of the Zacks-ranked industries is a result of improved earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2022 have increased 7.1% over the past year.
Before we present a few promising Manufacturing – Electronics stocks, it is worth taking a look at the industry’s performance and its valuation picture.
Industry Outperforms Sector But Underperforms the S&P 500
The Zacks Manufacturing – Electronics industry has outperformed its sector but underperformed the S&P 500 in the past year. The stocks in the industry have collectively gained 5% compared with the Zacks Industrial Products sector’s decline of 4.8% and the S&P 500’s rally of 13.5%.
One-Year Price Performance
Manufacturing – Electronics Industry’s Valuation
The Price/Earnings (P/E) ratio is commonly used for valuing the manufacturing stocks.
The industry’s forward 12-month P/E ratio is 21.95. This clearly shows that the industry is trading above the S&P 500’s forward 12-month P/E ratio of 19.69 and the sector’s 17.94.
Over the past five years, the industry has traded at the highest level of 26.61X forward 12-month earnings and the lowest level of 13.62X. The median level has been 19.2X over the same period.
Manufacturing – Electronics Industry’s Valuation Versus Sector
Manufacturing – Electronics Industry’s Valuation Versus S&P 500
4 Manufacturing – Electronics Stocks to Focus On
Below we discuss four stocks from the industry that have solid growth opportunities. The stocks either sports a Zacks Rank #1 (Strong Buy) or carries a Zacks Rank #2 (Buy) or a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Emerson Electric: Headquartered in St. Louis, MO, Emerson offers a wide range of products and services to customers in the consumer, commercial and industrial markets. The company stands to benefit from strength across its discrete, life sciences, chemical and power end markets along with recovery in the energy end market in the quarters ahead. Also, its robust backlog level and acquisitions are likely to boost its performance. Emerson currently has a Zacks Rank #3 and a market capitalization of $57.6 billion.
Shares of this company have jumped 8.6% in the past year. It reported better-than-expected results in each of the last four quarters, the average being 6.69%. Also, the company’s earnings estimates have improved 1.6% for fiscal 2022 (ending September 2022) and 1.5% for fiscal 2023 (ending September 2023) in the past 60 days.
Price and Consensus: EMR
Regal Rexnord: The company is a leading manufacturer and provider of electric motors and electronic controls, power transmission components, air moving products and specialty electrical components and systems worldwide. It is poised to benefit from strength across its general industrial, aerospace, agriculture, marine, heating, ventilation and air conditioning and food & beverage end markets. Also, its policy of rewarding its shareholders handsomely bodes well. It currently has a Zacks Rank #2 and a market capitalization of $11 billion.
The Beloit, WI-based company has gained 7.9% in the past year. It reported better-than-expected results thrice in the trailing four quarters, the average being 7.39%. In the past 60 days, the company’s earnings estimates have moved 1.9% north for 2022 and 2.1% for 2023.
Price and Consensus: RRX
Zurn Water Solutions: Based in Milwaukee, WI, Zurn manufactures and provides advanced water system solutions and stainless steel products across several industries. It is expected to benefit from strong product portfolio, solid demand for its products and solutions, acquisitions and shareholder-friendly policies in the quarters ahead. Zurn currently sports a Zacks Rank #1 and has a market capitalization of $4.5 billion.
Although shares of the company have lost 25.2% in the past year, it has gained 11% in the past month. It reported better-than-expected results in each of the last four quarters, the average being 62.43%. The company’s earnings estimates have improved 0.9% for 2022 and 1.6% for fiscal 2023 in the past 60 days.
Price and Consensus: ZWS
Franklin Electric: The company is a leading manufacturer and provider of water and fuel pumping systems throughout the world. It stands to benefit from its strong product offerings, solid end-market demand across all regions and product categories, acquired assets and shareholder-friendly policies. Franklin Electric currently carries a Zacks Rank #2 and has a market capitalization of $4 billion.
The stock of this Fort Wayne, IN-based company has gained 10% in the past year. It reported better-than-expected results thrice in the trailing four quarters, the average being 17.44%. In the past 60 days, the company’s earnings estimates have increased 10.9% for 2022.
Price and Consensus: FELE
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