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Instruments Control Industry Appears to be in the Doldrums
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The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems that are used in a wide range of industries worldwide. These companies deliver sophisticated flow measurement, control and communication solutions, which include air, water and other forms of gas and liquid for commercial and residential uses. The firms offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry.
Some of the industry participants also provide heating, ventilation, and air conditioning products. These comprise boilers, water heaters, heating solutions and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. In addition, few firms within the industry offer drainage and water re-use products, consisting of drainage products and rain water harvesting solutions for industrial, marine and residential applications.
Let’s take a look at three major themes in the industry —
• The industry has evolved over the past decade, and new forms of technology have been a major catalyst for change. As a result, companies face a variety of challenges, and success is largely dependent upon being able to adapt and overcome. As analytical instruments have little scope for differentiation, prominent equipment makers are following conventional strategies like forming alliances with other vendors or acquiring rivals to stay ahead of competition. The industry is primarily dependent on R&D activities, and as the local players lack huge capital, they either exit the market or get acquired by well-established suppliers.
• U.S.-based manufacturers face tough competition from all corners of the globe. China in particular has been a perennial concern as it can reportedly produce comparable products at lesser price tags. Most firms have to differentiate their products in a bid to maintain their market share in a highly competitive environment. Severe competition in the marketplace has led to loss of business for industry players and resulted in decline in average selling price of products. The ecosystem is also affected by the shift toward radio technology, with volatility in demand for replacement units. The increased competitiveness among vendors is, however, expected to accelerate growth outlook for industrial automation in the long run.
• Insufficient supply of raw materials and components at favorable prices has led to a material negative impact on businesses and financial health as this affects timely deliveries to customers. The United States is a major market for factory automation and industrial control. But U.S. manufacturers often fail to compete with their offshore counterparts in terms of price due to labor cost differentials and government regulations. Uncle Sam is also constantly adding new regulations and compliance issues that force suppliers to make adjustments, causing them to spend even more on monitoring compliance. Keeping abreast of regulations and managing compliance reporting is a challenge faced by industry participants.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #234, which places it at the bottom 9% 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 dull near-term prospects. Interestingly 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for the current year have decreased 8.3% over the past year, and the same for the next year has declined 17.2%.
Before we present a few instruments control stocks that are well positioned to outperform the market (despite broader challenges) based on a modest earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Trumps Sector, Lags S&P 500
The Zacks Instruments – Control industry has outperformed the broader Zacks Computer and Technology sector, but lagged the S&P 500 composite over the past year.
The industry has lost 2.8% over this period compared with the S&P 500’s decline of 0.7% while the broader sector has lost 3.4%.
One-Year Price Performance
Industry’s Current Valuation
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 11.25X compared with the S&P 500’s 10.56X. It is also above the sector’s trailing 12-month EV/EBITDA of 10.50X.
Over the past five years, the industry has traded as high as 13.79X, as low as 9.57X with the median of 11.41X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
The companies operating in this space are susceptible to near-term headwinds like pricing pressure, high R&D costs and supply-chain inadequacies. Despite the manufacturing challenges, the industry remains important to the U.S. economy. So, manufacturers need to utilize the latest technology in order to stay relevant, innovative and competitive. Furthermore, inventory challenges are common, and to overcome this, companies need to look into systems that can support more efficient operations, save costs and increase service levels. The biggest challenge is how to best implement IoT to achieve operational goals such as reducing costs, improving efficiency, supporting compliance and pushing product innovation.
None of the stocks in the space currently sports a Zacks Rank #1 (Strong Buy). So, we are presenting one stock carrying a Zacks Rank #2 (Buy) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
Woodward, Inc. (WWD - Free Report) : This Fort Collins, CO-based instruments control firm has added 32.7% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised 3.4% upward in the past 60 days. Woodward has long-term earnings growth expectation of 12.9%. The company delivered average positive earnings surprise of 20.1% in the trailing four quarters.
Price and Consensus: WWD
We are also presenting three stocks with a Zacks Rank #3 (Hold) that are well positioned to grow.
Watts Water Technologies, Inc. (WTS - Free Report) : Shares of this North Andover, MA-based instruments control firm have rallied 11.1% in the past year. The consensus estimate for current-year earnings has moved up 0.7% in the past 90 days. Watts Water has long-term earnings growth expectation of 8%. The company delivered average positive earnings surprise of 1.4% in the trailing four quarters.
Price and Consensus: WTS
Thermon Group Holdings, Inc. (THR - Free Report) : This Austin, TX-based instruments control firm has gained 6% year to date. The consensus estimate for current-year earnings for this stock has moved up 0.8% in the past 90 days.
Price and Consensus: THR
Nanometrics Incorporated : Shares of this Milpitas, CA-based instruments control firm have rallied 2% year to date. The consensus estimate for current-year earnings has moved up 8.7% in the past six months. The company delivered average positive earnings surprise of 8.3% in the trailing four quarters.
Price and Consensus: NANO
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This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
Image: Bigstock
Instruments Control Industry Appears to be in the Doldrums
The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems that are used in a wide range of industries worldwide. These companies deliver sophisticated flow measurement, control and communication solutions, which include air, water and other forms of gas and liquid for commercial and residential uses. The firms offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry.
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Some of the industry participants also provide heating, ventilation, and air conditioning products. These comprise boilers, water heaters, heating solutions and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. In addition, few firms within the industry offer drainage and water re-use products, consisting of drainage products and rain water harvesting solutions for industrial, marine and residential applications.
Let’s take a look at three major themes in the industry —
• The industry has evolved over the past decade, and new forms of technology have been a major catalyst for change. As a result, companies face a variety of challenges, and success is largely dependent upon being able to adapt and overcome. As analytical instruments have little scope for differentiation, prominent equipment makers are following conventional strategies like forming alliances with other vendors or acquiring rivals to stay ahead of competition. The industry is primarily dependent on R&D activities, and as the local players lack huge capital, they either exit the market or get acquired by well-established suppliers.
• U.S.-based manufacturers face tough competition from all corners of the globe. China in particular has been a perennial concern as it can reportedly produce comparable products at lesser price tags. Most firms have to differentiate their products in a bid to maintain their market share in a highly competitive environment. Severe competition in the marketplace has led to loss of business for industry players and resulted in decline in average selling price of products. The ecosystem is also affected by the shift toward radio technology, with volatility in demand for replacement units. The increased competitiveness among vendors is, however, expected to accelerate growth outlook for industrial automation in the long run.
• Insufficient supply of raw materials and components at favorable prices has led to a material negative impact on businesses and financial health as this affects timely deliveries to customers. The United States is a major market for factory automation and industrial control. But U.S. manufacturers often fail to compete with their offshore counterparts in terms of price due to labor cost differentials and government regulations. Uncle Sam is also constantly adding new regulations and compliance issues that force suppliers to make adjustments, causing them to spend even more on monitoring compliance. Keeping abreast of regulations and managing compliance reporting is a challenge faced by industry participants.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #234, which places it at the bottom 9% 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 dull near-term prospects. Interestingly 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for the current year have decreased 8.3% over the past year, and the same for the next year has declined 17.2%.
Before we present a few instruments control stocks that are well positioned to outperform the market (despite broader challenges) based on a modest earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Trumps Sector, Lags S&P 500
The Zacks Instruments – Control industry has outperformed the broader Zacks Computer and Technology sector, but lagged the S&P 500 composite over the past year.
The industry has lost 2.8% over this period compared with the S&P 500’s decline of 0.7% while the broader sector has lost 3.4%.
One-Year Price Performance
Industry’s Current Valuation
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 11.25X compared with the S&P 500’s 10.56X. It is also above the sector’s trailing 12-month EV/EBITDA of 10.50X.
Over the past five years, the industry has traded as high as 13.79X, as low as 9.57X with the median of 11.41X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
The companies operating in this space are susceptible to near-term headwinds like pricing pressure, high R&D costs and supply-chain inadequacies. Despite the manufacturing challenges, the industry remains important to the U.S. economy. So, manufacturers need to utilize the latest technology in order to stay relevant, innovative and competitive. Furthermore, inventory challenges are common, and to overcome this, companies need to look into systems that can support more efficient operations, save costs and increase service levels. The biggest challenge is how to best implement IoT to achieve operational goals such as reducing costs, improving efficiency, supporting compliance and pushing product innovation.
None of the stocks in the space currently sports a Zacks Rank #1 (Strong Buy). So, we are presenting one stock carrying a Zacks Rank #2 (Buy) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
Woodward, Inc. (WWD - Free Report) : This Fort Collins, CO-based instruments control firm has added 32.7% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised 3.4% upward in the past 60 days. Woodward has long-term earnings growth expectation of 12.9%. The company delivered average positive earnings surprise of 20.1% in the trailing four quarters.
Price and Consensus: WWD
We are also presenting three stocks with a Zacks Rank #3 (Hold) that are well positioned to grow.
Watts Water Technologies, Inc. (WTS - Free Report) : Shares of this North Andover, MA-based instruments control firm have rallied 11.1% in the past year. The consensus estimate for current-year earnings has moved up 0.7% in the past 90 days. Watts Water has long-term earnings growth expectation of 8%. The company delivered average positive earnings surprise of 1.4% in the trailing four quarters.
Price and Consensus: WTS
Thermon Group Holdings, Inc. (THR - Free Report) : This Austin, TX-based instruments control firm has gained 6% year to date. The consensus estimate for current-year earnings for this stock has moved up 0.8% in the past 90 days.
Price and Consensus: THR
Nanometrics Incorporated : Shares of this Milpitas, CA-based instruments control firm have rallied 2% year to date. The consensus estimate for current-year earnings has moved up 8.7% in the past six months. The company delivered average positive earnings surprise of 8.3% in the trailing four quarters.
Price and Consensus: NANO
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>