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3 Instruments Stocks Set to Gain From Solid Sector Dynamics
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The Zacks Instruments – Control industry is likely to benefit from the diligent focus on energy-efficient production processes and integrated software systems. Surging demand for state-of-the-art technology for replacing legacy industrial control systems with automated products is also expected to aid growth.
However, commodity price inflation amid a challenging geopolitical environment might hurt the process automation and instrumentation market. Nevertheless, Woodward, Inc. (WWD - Free Report) , Badger Meter, Inc. (BMI - Free Report) and Thermon Group Holdings, Inc. (THR - Free Report) are likely to gain from high digitized technology demand, greater emphasis on energy efficiency, focus on cost-reduction initiatives and broad-based endorsement 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
Digitized Technologies Gaining Precedence: The industry’s growth is largely driven by the emphasis on digitized technologies in manufacturing activities, such as the Industrial Internet of Things. The demand for process automation, instrumentation products, safety automation systems and multivariable pressure transmitters for the fast-track manufacturing process is likely to fuel long-term growth opportunities. The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. Therefore, 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 positions.
Waning Margins: Material cost inflation, resulting from constant inflationary pressures, has been affecting industry players’ margins. Transportation costs are 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 schedules of various firms. While the companies are focused on improving their operating performances, 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 primarily 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 distribution channels and changes in OEM and aftermarket pricing, are likely to hamper operations and affect sales for industry participants.
Focus on Industrial Automation: Greater focus on increased adoption of automation across all industry verticals and higher investments in new technologies are expected to drive growth over the next few years. 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 growth. The pharmaceutical industry's process automation and instrumentation market are also growing due to low-cost factors and an evolving regulatory environment. Focus on high-quality equipment indicates progressive buyer maturity and willingness to partner with process control industry players.
Thrust on Green Fuels: The industry participants are increasingly gaining traction from solid demand for power generation, especially in Asia, and continued requirement for backup power for data centers. Higher demand across transportation and power generation markets, especially on-highway natural gas truck business in China, has led to healthy growth momentum. In addition, higher demand for alternative fuels across the marine industry and solid impetus in the global marine market brought on by higher utilization and rising shipbuilding rates are likely to be long-term growth drivers.
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 #40, which places it in the top 16% 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 us take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms S&P 500, Lags Sector
The Zacks Instruments – Control industry has outperformed the S&P 500 composite but lagged the broader Zacks Computer and Technology sector over the past year.
The industry has soared 34.7% compared with the S&P 500 and the sector’s growth of 26.5% and 39.4%, respectively.
One-Year Price Performance
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 12.84X compared with the S&P 500’s 14.65X. It is also below the sector’s trailing 12-month EV/EBITDA of 14.16X.
Over the past five years, the industry has traded as high as 17.78X and as low as 6.83X, with a median of 12.4X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Instruments Control Stocks to Watch
Woodward: Headquartered in Fort Collins, CO, the company is an independent designer, manufacturer and service provider of energy control and optimization solutions. It 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 plans to shift some of the machine components to its factories/capable third-party suppliers to reduce costs and lead time. The stock has gained 61.2% in the past year. It has a long-term earnings growth expectation of 16.3% and delivered an earnings surprise of 26.1%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current and next-year earnings has been revised 41.2% and 55.1% upward, respectively, over the past year. Woodward sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: WWD
Badger Meter: Headquartered in Milwaukee, WI, the company provides flow measurement, control and communications solutions, serving water and gas utilities, municipalities, and industrial customers worldwide. Its products measure water, oil, chemicals and other fluids, and are known for accuracy, long-lasting durability and 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 and next-year earnings for this Zacks Rank #1 stock has been revised 33.2% and 33.8% upward, respectively, over the past year. The stock has gained 41.3% in the past year. It has a long-term earnings growth expectation of 15.6% and delivered an earnings surprise of 12.7%, on average, in the trailing four quarters.
Price and Consensus: BMI
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 stock has gained 61.2% in the past year and has a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has been revised 2.9% upward over the past year. This Zacks Rank #3 (Hold) stock has delivered an earnings surprise of 27.3%, on average, in the trailing four quarters.
Price and Consensus: THR
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3 Instruments Stocks Set to Gain From Solid Sector Dynamics
The Zacks Instruments – Control industry is likely to benefit from the diligent focus on energy-efficient production processes and integrated software systems. Surging demand for state-of-the-art technology for replacing legacy industrial control systems with automated products is also expected to aid growth.
However, commodity price inflation amid a challenging geopolitical environment might hurt the process automation and instrumentation market. Nevertheless, Woodward, Inc. (WWD - Free Report) , Badger Meter, Inc. (BMI - Free Report) and Thermon Group Holdings, Inc. (THR - Free Report) are likely to gain from high digitized technology demand, greater emphasis on energy efficiency, focus on cost-reduction initiatives and broad-based endorsement 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
Digitized Technologies Gaining Precedence: The industry’s growth is largely driven by the emphasis on digitized technologies in manufacturing activities, such as the Industrial Internet of Things. The demand for process automation, instrumentation products, safety automation systems and multivariable pressure transmitters for the fast-track manufacturing process is likely to fuel long-term growth opportunities. The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. Therefore, 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 positions.
Waning Margins: Material cost inflation, resulting from constant inflationary pressures, has been affecting industry players’ margins. Transportation costs are 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 schedules of various firms. While the companies are focused on improving their operating performances, 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 primarily 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 distribution channels and changes in OEM and aftermarket pricing, are likely to hamper operations and affect sales for industry participants.
Focus on Industrial Automation: Greater focus on increased adoption of automation across all industry verticals and higher investments in new technologies are expected to drive growth over the next few years. 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 growth. The pharmaceutical industry's process automation and instrumentation market are also growing due to low-cost factors and an evolving regulatory environment. Focus on high-quality equipment indicates progressive buyer maturity and willingness to partner with process control industry players.
Thrust on Green Fuels: The industry participants are increasingly gaining traction from solid demand for power generation, especially in Asia, and continued requirement for backup power for data centers. Higher demand across transportation and power generation markets, especially on-highway natural gas truck business in China, has led to healthy growth momentum. In addition, higher demand for alternative fuels across the marine industry and solid impetus in the global marine market brought on by higher utilization and rising shipbuilding rates are likely to be long-term growth drivers.
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 #40, which places it in the top 16% 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 us take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms S&P 500, Lags Sector
The Zacks Instruments – Control industry has outperformed the S&P 500 composite but lagged the broader Zacks Computer and Technology sector over the past year.
The industry has soared 34.7% compared with the S&P 500 and the sector’s growth of 26.5% and 39.4%, respectively.
One-Year Price Performance
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 12.84X compared with the S&P 500’s 14.65X. It is also below the sector’s trailing 12-month EV/EBITDA of 14.16X.
Over the past five years, the industry has traded as high as 17.78X and as low as 6.83X, with a median of 12.4X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Instruments Control Stocks to Watch
Woodward: Headquartered in Fort Collins, CO, the company is an independent designer, manufacturer and service provider of energy control and optimization solutions. It 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 plans to shift some of the machine components to its factories/capable third-party suppliers to reduce costs and lead time. The stock has gained 61.2% in the past year. It has a long-term earnings growth expectation of 16.3% and delivered an earnings surprise of 26.1%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current and next-year earnings has been revised 41.2% and 55.1% upward, respectively, over the past year. Woodward sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: WWD
Badger Meter: Headquartered in Milwaukee, WI, the company provides flow measurement, control and communications solutions, serving water and gas utilities, municipalities, and industrial customers worldwide. Its products measure water, oil, chemicals and other fluids, and are known for accuracy, long-lasting durability and 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 and next-year earnings for this Zacks Rank #1 stock has been revised 33.2% and 33.8% upward, respectively, over the past year. The stock has gained 41.3% in the past year. It has a long-term earnings growth expectation of 15.6% and delivered an earnings surprise of 12.7%, on average, in the trailing four quarters.
Price and Consensus: BMI
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 stock has gained 61.2% in the past year and has a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has been revised 2.9% upward over the past year. This Zacks Rank #3 (Hold) stock has delivered an earnings surprise of 27.3%, on average, in the trailing four quarters.
Price and Consensus: THR