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4 Testing Equipment Stocks to Escape a Challenging Industry

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Supply-chain disruptions and end-market dynamics across the world due to the coronavirus pandemic affected the Zacks Electronics – Testing Equipment industry negatively. Notably, depressed automotive, industrial and linear markets are weighing heavily on the industry’s prospects.

However, companies like Teradyne (TER - Free Report) , AMETEK (AME - Free Report) , Cognex (CGNX - Free Report) and National Instruments Corporation (NATI - Free Report) are well-poised to benefit from 5G-related growth opportunities, strengthening automation drive and the ongoing learn-from-home and work-from-home trends. Further, the emergence of software-enabled testing instruments and devices remains a silver lining for the industry participants.

Industry Description

The Zacks Electronics – Testing Equipment industry comprises companies that offer advanced instruments, electronic testing equipment solutions, thermal management systems, electrical connectors, motors and various test solutions.

The major end-markets being served by this particular industry are consumer, automobile, industrial, aerospace & defense, healthcare, semiconductors and communications to name a few..

3 Trends Shaping the Future of Electronics – Testing Equipment Industry

Supply-Chain Disruptions a Perennial Woe: The industry players are reeling under the impact of coronavirus-induced macroeconomic headwinds. The supply-chain issues stemmed from social-distancing and shelter-in-place restrictions due to the current pandemic situation, which in turn, severely impacted these companies. Although economies are gradually reopening in several parts of the world, production delays remain a major concern. Moreover, the panoptic impact of the COVID-19-led crisis aggravated worries over the ongoing economic downturn, which continues to wreak havoc on new bookings of the industry players including prominent ones like Fortive (FTV - Free Report) and AMETEK. Additionally, the resurgence of COVID-19 cases with mounting health risks and the consequent rise in death toll made people more apprehensive about further interruptions, which could upset their spending patterns.

Softnessin Non-COVID-19 Testing Labs is a Downside: Although the industry participants remain well-positioned to capitalize on the increasing usage of electronic testing equipment and software in the interrogation of biological properties of molecules and cells in clinical and medical science research work, COVID-19-led economic turmoil has been taking a toll on this domain of the industry. Notably, sluggish demand for electronic equipment parts across several non-COVID-19 diagnostic testing labs is a major negative. For instance, Agilent (A - Free Report) , one of the notable players in the underlined industry, is suffering a setback from declining equipment purchases by customers amid this pandemic.

5G Prospects Are a Key Catalyst: The growing deployment of 5G holds near-term promise for the industry players. An uptick in demand for 5G test solutions, which are required for 5G deployment, is a major positive. Moreover, the current coronavirus-triggered work-from-home and learn-from-home wave globally, which is bolstering demand for high-speed Internet services, bodes well for the electronic companies that are enhancing their 5G efforts. Additionally, the growing number of high-speed data centers worldwide is a tailwind. Given this upbeat scenario, the industry is anticipated to remain on the growth trajectory, backed by strong efforts made toward bolstering 5G strength.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Electronics – Testing Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #217, which places it in the bottom 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 bearish 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.

Despite such a gloomy industry scenario, a few stocks show potential to outperform the market based on a strong earnings outlook. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and the current valuation first.

Industry Beats S&P 500, Lags Sector

The Zacks Electronics – Testing Equipment Industry has outperformed the Zacks S&P 500 composite but underperformed the broader Zacks Computer and Technology sector in the past year.

The stocks in this industry have collectively gained 22.4% compared with the Zacks S&P 500’s and the Zacks Computer and Technology sector’s rally of 15.1% and 36.1%, respectively.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings ratio (P/E), which is a commonly used multiple for valuing the Electronics – Testing Equipment stocks, the industry is currently trading at 28.91X, higher than the S&P 500’s 22.51X and the sector’s 26.33X.

Over the past five years, the industry has traded as high as 28.91X and as low as 18.30Xwith the median being at 22.85X as the chart below shows.

Forward 12-Month P/E Ratio

 

4 Testing Equipment Stocks to Keep a Close Eye on

Teradyne: This North Reading, MA-headquartered company is well-poised to capitalize on the accelerating 5G deployment. Further, its strength across Semiconductor Test and System Test businesses is a boon. Moreover, the company continues to benefit from the growing memory market exposure, solid Test demand and a strong product line-up.

Further, this currently Zacks Rank #2 (Buy) company, which is a leading provider of automated test equipment, remains optimistic about the Universal Robots acquisition and its continuous design wins. We believe, the company is well-poised to cash in on the significant pool of opportunities in the high-growth wireless test market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, shares of Teradyne have soared 54.1% in the past year. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 16% over the last 30 days to $4.49 per share.

Price and Consensus: TER

AMETEK: This Berwyn, PA-based company is gaining on solid contributions from Gatan and IntelliPower acquisitions, which are driving growth in its Electronic Instruments segment. Further, the company’s strengthening momentum across defense end-market is a major lever.

Additionally, the company, which is the manufacturer of electronic appliances and electromechanical devices, remains optimistic about its robust position in the medical and healthcare businesses. Also, this presently Zacks Rank #3 (Hold) company’s proper execution of its four core growth strategies, namely operational excellence, global market expansion, investments in product development and acquisitions are expected to continue aiding its finances in the near term.

Notably, the stock has jumped 21.6% in the past year. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 3.5% over the last 30 days to $3.88 per share.

Price and Consensus: AME

Cognex: Domiciled in Natick, MA, the company is benefiting from an uptick in demand for its products from large customers. Further, the growing momentum of Cognex machine visionowing to the ongoing online learning and work-from-home trend, which is spurring the need for tablets, laptops and wearable devices, remains a major upside.

Moreover, this presently Zacks #3 Ranked company, which is a developer and manufacturer of machine vision systems, remains well-positioned to reap benefits from the factory automation space.

Notably, Cognex has returned 56% in the past year. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 28.8% over the last 30 days to 94 cents per share.

Price and Consensus: CGNX

National Instruments Corporation: Based in Austin, TX, the company, which is the producer of automated test equipment and virtual instrumentation software, is gaining from strengthening design-to-test offerings. Further, increase in production ramp of 5G smartphones is acting as a key driver for the company.

Additionally, this company with a current Zacks Rank of 3 remains upbeat about its strengthening software position. Also, the company’s robust cost-saving strategies are likely to support its financial foot hold in the near term.

Notably, National Instrument has returned 56% in the past year. Notably, the Zacks Consensus Estimate for 2020 earnings has been revised upward by 7.4% over the last 30 days to $1.16 per share.

Price and Consensus: NATI

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