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Electronics Miscellaneous Products Outlook: Trade Woes Ahead

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The Zacks Electronics – Miscellaneous Products Industry comprises an array of companies with diversified end-markets.

The industry includes a number of Original Equipment Manufacturers (OEMs) of different devices like air-conditioning systems, GPS navigation, home automation systems, healthcare devices, industry/factory automation, robotics and semiconductor applications.

Moreover, apart from the United States, a number of companies in this industry are domiciled in Japan, Germany, the Netherlands and Switzerland.

However, the common thread between these is either they have manufacturing operations in China and South-East Asia or generate significant revenues from this region.

Notably, the Chinese government’s strategy of providing subsidy has been a major driver for factory automation demand in China.

Hence, the whole industry is tottering from the ongoing tariff dispute between the United States and China, particularly in markets like robotics, industrial automation and semiconductor applications.

Moreover, being OEMs, the industry participants are exposed to volatility in prices of commodities like Copper. Commodity prices are likely to increase in the near term due to growing demand and concerns over tightening global supplies. Trade tension between the United States and China could also push the prices higher.

Further, volatility in foreign exchange, particularly in currencies like Japanese yen and Thai baht negatively impact industry participants.

The resurgence in Japanese yen is expected to continue in the second half due to growing U.S. protectionism and headwinds in the emerging markets. This doesn’t bode well for the Zacks Electronics – Miscellaneous Products Industry.

Industry Lags on Shareholder Returns

Looking at shareholder returns over the past year, it appears that a tough operating environment has been hurting investor sentiments in the Electronics – Miscellaneous Products industry’s growth prospects.

The Zacks Electronics – Miscellaneous Products Industry, within the broader Zacks Computer And Technology Sector, has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 7.8%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 12.6% and 19.2%, respectively.

One-Year Price Performance




Electronics – Miscellaneous Products Stocks Trading Cheap

Thanks to the underperformance of the industry over the past year, the Electronics – Miscellaneous Products industry’s valuation looks cheap at the moment. One might get a good handle on the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings.

Notably, a lower P/E ratio is always better.

The industry currently has a forward 12-month P/E ratio of 16.13, which is below the median level and close to the lowest level over the past year.

The space also looks inexpensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 16.82 and the median level is 18.34.

Price/Earnings F12M


Moreover, a comparison of the group’s P/E ratio with that of its border sector ensures that the group is trading at a significant discount. The Zacks Computer And Technology Sector’s forward 12-month P/E ratio of 19.20 and the median level of 20.53 for the same period are way above the Zacks Electronics – Miscellaneous Products Industry’s respective ratios.

Price/Earnings F12M



 

Underperformance May Continue Due to Dim Earnings Outlook

The ongoing trade tensions between the United States and China, increasing foreign exchange volatility and rising commodity prices are expected to hurt shareholder returns in the near term.

However, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance.

Price and Consensus: – Zacks Electronics – Miscellaneous Products Industry


 

This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the $1.73 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Electronics – Miscellaneous Products industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the EPS of the industry for 2018, but how this projection has evolved recently.

As you can see here, the $1.73 EPS estimate for 2018 has remained steady from the end of April, but declined from $1.78 at the end of March. In other words, the sell-side analysts covering the companies in the Zacks Electronics – Miscellaneous Products industry have been pessimistic about raising their estimates.

Current Fiscal Year EPS Estimate Revisions



 

Zacks Industry Rank Blurs Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.

The Zacks Electronics – Miscellaneous Products industry currently carries a Zacks Industry Rank #231, which places it at the bottom 10% of the 256 Zacks industries. 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.

Our proprietary Heat Map shows that the industry’s rank has continually deteriorated over the past five weeks.

 



Now, looking at the past revenue performances, the prospect of the industry also looks bleak.

 



 

Bottom Line

A slow market growth rate and looming tensions over a trade war could weigh on the prospects of the Electronics – Miscellaneous Products industry. Below are two stocks that carry a bearish Zacks Rank that we would recommend investors to stay away from for the time being.

Fujitsu General Limited (FGELF - Free Report) : Kawasaki, Japan-based Fujitsu carries a Zacks Rank #5 (Strong Sell). The stock has lost 37.5% over the past year. The consensus EPS estimate for the company has moved 15.3% lower for the current year, over the last 60 days.

Price and Consensus: FGELF



Hoya Corporation (HOCPY - Free Report) : Tokyo-based Hoya also carries a Zacks Rank #5. The stock has gained 9.8% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 4.3% downward over the last 60 days.

Price and Consensus: HOCPY



However, there are couple of stocks that investors can pick to gain a footing in this industry. These stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Garmin Ltd. (GRMN - Free Report) : The GPS technology provider has a Zacks Rank #2. The stock has returned 17.6% over the past year. The Zacks Consensus Estimate for the current-year EPS has increased by a penny over the last 60 days.

Price and Consensus: GRMN



Daikin Industries, Ltd. (DKILY - Free Report) : The consensus EPS estimate for this Japan-based air conditioning solutions provider has remained steady at 60 cents, over the last 30 days. The stock has rallied 15% over the past year.

Price and Consensus: DKILY

 

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