The Zacks Electronics - Manufacturing Machinery industry is expected to benefit from increased capital spending on high-performance computing, advanced packaging and memory by semiconductor manufacturers. Rising need for data center, notebooks (due to coronavirus-induced remote working and learning) and gaming (user base has expanded due to lockdowns and shelter-in-place guidelines) is driving memory demand.
Entegris (ENTG - Free Report) , MKS Instruments (MKSI - Free Report) , Brooks Automation (BRKS - Free Report) and Ultra Clean Technology (UCTT - Free Report) are benefiting from the above-mentioned trends. All these stocks provide solutions to the semiconductor manufacturers and OEMs. Although weak smartphone demand has been a concern, strength in cloud & data center as well as 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. Consistent shift to smaller dimensions, rapid adoption of new device architectures 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. For instance, Intel (INTC - Free Report) expects to improve device performance by 20% in its upcoming 10nm solutions using its latest SuperFin transistor technology. Moreover, emergence of techniques like wafer level packaging (WLP) 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 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 growing demand for edge computing are key catalysts. However, U.S.-China trade tensions and the impact of coronavirus on consumer appetite for next-gen smartphones are notable headwinds.
Strong NAND, DRAM & SSD Demand: Improving demand for particularly 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. Additionally, strong new equipment spending is a major positive.
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 #30, which places it in the top 12% 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 Apr 30, 2020, the industry’s earnings estimates for 2020 have moved up 27.3%.
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 Lags Sector, Outperforms S&P 500
The Zacks Electronics - Manufacturing Machinery industry has lagged the broader Zacks Computer and Technology sector but outperformed the S&P 500 composite over the past year.
The industry has gained 23.7% over this period compared with the S&P 500’s rally of 13.8% and the broader sector’s increase of 34.2%.
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 12.80X compared with the S&P 500’s 14.73X. It is also below the sector’s trailing-12-month EV/EBITDA of 14.56X.
Over the last five years, the industry has traded as high as 16.70X, as low as 5.51X and at the median of 10.91X, as the chart below shows.
EV/EBITDA Ratio (TTM)
4 Electronics Stocks to Buy Right Now
Ultra Clean Holdings: This Hayward, CA-based company is benefiting from an expanding clientele. Robust demand for its part cleaning, surface encapsulation and high sensitivity micro contamination analysis solutions is a key catalyst. Moreover, recovery in wafer fab utilization bodes well for this Zacks Rank #1 (Strong Buy) company. You can see the complete list of today’s Zacks #1 Rank stocks here.
Further, the 10-year partnership with Applied Materials that aims to optimize material and part selection, procurement, packaging, warehousing, transportation and recycling to reduce energy and emissions, and conserve resources is expected to boost Ultra Clean’s top-line growth. An expanding global footprint in Malaysia is another positive.
The Zacks Consensus Estimate for its 2020 earnings has stayed at $2.42 per share in the past 30 days. Ultra Clean’s shares are up 29.4% year to date.
Price and Consensus: UCTT
MKS Instruments: This global provider of instruments, subsystems and process control solutions is benefiting from an improving semiconductor market along with a lean cost structure. Moreover, the Electro Scientific Industries acquisition strengthened the company’s offerings in optics, photonics and laser markets. This diversification not only lowered exposure to semiconductors but also improved its cash flow generation ability. The MA-based company gains traction from stable Vacuum & Analysis, and Equipment & Solutions segments. This Zacks Rank #2 (Buy) company’s latest HDI PCB laser-manufacturing solution has been gaining traction in Asia. Moreover, the anticipated reopening of universities and research labs over the next couple of months is likely to benefit advanced-market segment revenues.
The Zacks Consensus Estimate for its 2020 earnings stayed at $6.57 per share over the past 30-days. MKS’ shares are up 11.8% year to date.
Price and Consensus: MKSI
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 increasing need for end-to-end contamination control solutions. Further, the acquisition of GMTI strengthens Entegris' position as the premier supplier of yield enhancement solutions for the semiconductor market.
Markedly, the consensus mark for its current-year earnings has been unchanged at $2.38 per share over the past 30 days. Entegris’ shares have gained 42.9% year to date.
Price and Consensus: ENTG
Brooks Automation: This Chelmsford, MA-based company is benefiting from robust growth in its life sciences business driven by COVID-19-led demand. Moreover, this global provider of semiconductor manufacturing automation solutions and life science sample-based services and solutions has significantly expanded its life science clientele. Markedly, China also offers significant growth opportunity for its life sciences segment. Moreover, solid demand for contamination control solutions remains a key catalyst.
The consensus mark for this Zacks Rank #2 company's fiscal-year 2020 earnings has moved up 5.6% to $1.14 per share over the past 30 days. The stock has gained 16.3% year to date.
Price and Consensus: BRKS