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3 Electronics Stocks to Buy From a Prospering Industry

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The Zacks Electronics – Miscellaneous Products industry is benefiting from rise in semiconductor capital expenditure despite the negative impact of the coronavirus pandemic. Additionally, increasing spending on advanced technologies bodes well for industry participants. Moreover, continuing investments on data-center, high-performance computing (HPC) and 5G end-markets are key catalysts. Also, higher spending on memory equipment is expected to drive growth in 2021. Further, optimism over the vaccine roll-out is anticipated to aid industry participants, including Koninklijke Philips (PHG - Free Report) , Carrier Global (CARR - Free Report) and Garmin (GRMN - Free Report) .

Industry Description

The Zacks Electronics – Miscellaneous Products industry includes a number of original equipment manufacturers (OEMs) of air-conditioning systems, remote control systems, GPS navigation, home automation systems, healthcare devices, industry/factory automation, robotics, semiconductor applications and energy management solutions.

Apart from the United States, companies in this industry are domiciled in Japan, Germany, the Netherlands and Switzerland. These companies either have manufacturing operations in China and South-East Asia or generate significant revenues from the regions.

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Solid Capital Spending Drives Prospects: Increasing capital expenditure of semiconductor companies like TSMC, Samsung and Intel (INTC - Free Report) , major customers of miscellaneous electronics product manufacturers, is expected to improve further in 2021 and beyond on investments in infrastructure as well as expanded capacity. In addition, rising spending on advanced nodes — 7 nm, 5 nm and 3 nm processes from logic and foundry customers — bodes well for industry participants. In fact, logic and foundry spending is anticipated to remain healthy this year. Although data-center, high-performance computing (HPC) and 5G-related infrastructure demand looks encouraging, downbeat business sentiments due to COVID-19 can affect spending in the near term.

Coronavirus Pandemic Remains a Headwind: Industry participants like KLA Corp (KLAC - Free Report) , Garmin and Carrier Global are bearing the brunt of the coronavirus-induced challenging macro-economic environment, which might hurt prospects in the current year. Though factories in China have resumed operations, the COVID-19-related uncertainties are expected to disrupt end-market demand (automotive, IoT). Moreover, a dull demand environment in Europe and North America might erode sales and profitability, at least in the near term. Timing of the demand recovery is also indefinite.

Volatility in Commodity Prices is a Concern: OEMs are exposed to volatility in the prices of commodities like copper and steel. The coronavirus pandemic is negatively impacting commodity markets due to a sharp slowdown in global manufacturing activity despite the unprecedented stimulus measures taken to buoy demand. Apart from this, industry participants are expected to face headwinds due to the U.S. ban on Huawei and HiSilicon.

Zacks Industry Rank

The Zacks Electronics – Miscellaneous Products industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #86, which places it in the top 34% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates continued outperformance in the days to come. 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 positioning in the top 50% of the Zacks-ranked industries is a result of the 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 May 31, 2020, the industry’s earnings estimates for the current year have moved up 14.4%.

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 Outperforms S&P 500, Lags Sector

The Zacks Electronics – Miscellaneous Products industry has outperformed the S&P 500 Index but lagged its own sector in the past year.

The industry has gained 19.2% during this period compared with the S&P 500 composite’s appreciation of 17.4% and the broader sector’s rally of 35.7%.

One-Year Price Performance



Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing electronics-miscellaneous products companies, we see that the industry is currently trading at 21.10X compared with the S&P 500’s 23.11X and the sector’s forward-12-month P/E of 28.44X.

Over the last five years, the industry has traded as high as 21.10X, as low as 12.67X and at the median of 16.43X, as the chart below shows.

Forward 12-Month Price-to-Earnings (P/E) Ratio

 

 

Stocks to Consider

Koninklijke Philips – This Zacks Rank #2 (Buy) company benefits from solid demand for patient monitors, hospital ventilators, computed tomography and portable ultrasound systems. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Furthermore, increased interest in telehealth solutions like tele-ICU, tele-radiology and tele-pathology, which help virtual working and collaboration of healthcare professionals, bodes well for Philips. A widening product portfolio is also adding to customer strength. Moreover, an expanding partner base strengthens the company’s prospects.

Shares have returned 8.4% over the past year. The Zacks Consensus Estimate for 2021 earnings has moved up 10.6% to $2.60 per share over the past 60 days.

Price and Consensus: PHG

 

Carrier Global – The Palm Beach Gardens, FL-based company is gaining from encouraging demand for HVAC and favourable residential trends. Moreover, this Zacks Rank #2 company is anticipated to benefit from stringent cost savings.

Further, a solid free cash-flow generating ability bodes well for the company’s prospects.

Shares have gained 56.5% in the past six months. The Zacks Consensus Estimate for Carrier’s current-year earnings has moved up by a penny to $1.86 per share in 60 days’ time.

Price and Consensus: CARR

 

Garmin – The GPS technology-based device provider is riding on the solid momentum across the Fitness and Outdoor segments owing to growing demand for advanced wearables and adventure watches. Also, benefits from the Tacx buyout are tailwinds. In addition, a well-performing Marine segment, backed by robust demand for chartplotters, is a major positive. Solid adoption of advanced sonars is also contributing well. Additionally, impressive momentum across specialty categories and new OEM programs is another positive. Garmin’s strong focus on continued innovation, diversification and market expansion to explore growth opportunities in all its segments is another tailwind.

The Zacks #2 Ranked stock has rallied 24.3% in the past year. The Zacks Consensus Estimate for this GPS technology provider’s ongoing-year earnings has been revised 26.1% upward to $4.06 over the past 60 days.

Price and Consensus: GRMN

 

 

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