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Near-Term Manufacturing Electronics Outlook Remains Bleak

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The Zacks Manufacturing-Electronics industry comprises companies that are engaged in producing various types of electronic products, like battery charges, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls, water management products and motive power devices in the market. These businesses also offer state-of-the-art customer-support and after-market services to end users.

The manufacturing electronic companies sell products and services in various types of end-markets, like robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.  

 Here are the three major themes in the industry:

  • Of late, U.S. manufacturing companies have been buoyed by sturdy domestic economic conditions, primarily due to thrust on infrastructure and stimulus provided by the Republic-led government. Economic policies adopted by the Trump administration, including its corporate tax overhaul and impetus to streamline business regulations, have aided in steaming up manufacturing activity. We notice that U.S. manufacturing companies are not only hiring more, but also offering relatively higher wages in the market. Notably, the manufacturing domain added 27,000 new jobs in November and offered an average weekly pay of $1,109.76, higher than $940.84 paid by the private sector taken together. The Institute for Supply Management’s (ISM) manufacturing gauge was pegged at 54.1% this December, marking the 116th consecutive month of overall economic expansion. An above-50 ISM Index indicates growth in American manufacturing. Against this backdrop, we believe corporate spending across the electronic manufacturing stockswill likely shore up at a healthy pace, moving ahead.
     
  • U.S. manufacturing companies are rife with apprehensions concerning the outcome of a full blown trade war between the United States and other countries, including China. Notably, the White House and Beijing have slapped tariffs over goods valuing billions of dollars this year, escalating fears of tighter trade conditions. We notice that these duties are resulting in material cost inflation and pulling down margins of many electronic product manufacturing companies. Some manufacturers are defying inflation with selling price adjustments. Nonetheless, these amendments are making exports expensive and depressing overseas revenues of these businesses. Also, a stronger U.S. dollar is currently weighing over the overseas trading arms of these companies.
     
  • The American manufacturing companies are also plagued with shortage of skilled laborers, higher wage costs and flaring-up transportation expenses. Numerous electronic manufacturing companies are currently looking for innovative technologies to drive their operational efficacy. However, in this course, these businesses are grappling with the issue of severe scarcity in skilled workforce. Additionally, a tightening labor market scenario is escalating wage rates in the market. Per the Labor Department, the 12-month rate of hourly wage gains climbed by 6% in November, to $27.35. In addition, the state of affairs has turned complex for U.S. manufacturers, thanks to the ongoing doldrums within the trucking industry. The industry is currently battling a number of issues, like shortage of truck drivers and soaring truck fuel surcharges. On account of these issues, U.S. manufactures are now troubled with supply-side challenges relating to lead-time expansions and elevated freight charges. These setbacks may continue to aggravate costs and mar profits of industrial manufacturing companies in the near future.
     

The electronic product manufacturing companies are being supported by a healthy domestic economy, lately. However, escalating capacity constraints amid expensive raw materials and skilled labor shortages are tampering growth momentum of these businesses.  

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Manufacturing-Electronics industry is housed within the broader Zacks Industrial Products sector. It carries a Zacks Industry Rank #177, which places it at the bottom 32% 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 bleak near-term prospects. Our research shows that the bottom 50% of the Zacks-ranked industries underperforms the top 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 keeping less faith in this group's earnings growth potential. Since Feb 28, 2018, the industry’s earnings estimates for 2018 have moved down by 1.9%and the same forthe current year has dipped 5.8%.

Let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Lags S&P 500, Outshines Sector

The Manufacturing-Electronics industry has lagged the S&P 500 Index but outperformed the broader Industrial Products sector, over the past year.

The industry has lost 20.9% during this period compared with the S&P 500’s loss of 6.5% and broader sector’s fall of 22.1%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is the most appropriate multiple for valuing industrial manufacturing stocks, the Manufacturing-Electronics industry is currently trading higher than the benchmark S&P 500 Group and its broader sector. The industry’s trailing-12-month EV/EBITDA is currently pegged at 13.43X, as against 12.02X and 9.62X recorded by its boarder sector and S&P 500 Group, respectively.

Over the past five years, the industry has traded as high as 16.93X, as low as 10.02X and at the median of 13.55X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

 

Bottom Line

The U.S. Purchasing Managers Index has remained above 50 in 2018, undoubtedly verifying that the space remains in sturdy health. The industry is also adding to its payrolls at a healthy pace, with 288,000 gains in 2018. Nonetheless, material cost inflation (on account of tariffs), skilled workforce shortage, flaring-up wage costs, elevated transportation expenses and waning international demand might dent profitability of these businesses in the near future.

The downsides sweeping through the equity universe have left the electronic manufacturing industry in a bad shape. However, through our Stock Screener, we have handpicked four promising electronic product manufacturing stocks for your portfolio. We believe these companies possess the potential to sail through the jittery market conditions and will likely outshine many industry peers going forward.

Enersys (ENS - Free Report) produces, markets and distributes different types of industrial batteries globally. The stock’s Zacks Consensus Estimate for earnings has moved up 2.8% to $5.11 per share for fiscal 2019 (ending March 2019), over the past 90 days. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

 

CUI Global, Inc.  engages in the commercialization and development of electromechanical and power components. The company currently carries a Zacks Rank of 2. The stock’s Zacks Consensus Estimate for current-year earnings has moved up 5.9% to 18 cents per share, over the past 90 days.

 

Rexnord Corporation  produces, designs and sells water management, as well as process and motion control products globally. The company currently carries a Zacks Rank #3 (Hold). The stock’s Zacks Consensus Estimate for earnings has climbed 2.9% to $1.75 per share for fiscal 2019 (ending March 2019), over the past 90 days.

 

Regal Beloit Corporation (RBC - Free Report) manufactures and sells power transmission, power generation and electric motors products in the market. The company currently carries a Zacks Rank of 3. The stock’s Zacks Consensus Estimate for current-year earnings has inched up 0.3% to $6.56 per share, over the past 90 days.

 

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