The Zacks Instruments - Scientific industry is benefiting from strong end-market demand, particularly from life science, pharmaceutical and academic markets. Increasing demand for generic drugs and biosimilars is also driving growth for the scientific tool and apparatus providers.
The growth prospect of the Instruments - Scientific industry is quite bright in the near term given rising spending by the government and academic labs. The $3-billion increase in the National Institute of Health (NIH) budget for fiscal 2018 also bodes well for this industry.
Moreover, socio-economic factors like aging demography and increasing environmental regulations are driving demand for scientific measurement solutions.
Additionally, continued innovation by pharma companies that are increasingly focusing on large molecule therapies, which demand more analytical measurement content, is positive for the Instruments - Scientific industry participants.
Further, the industry is gaining from increasing exposure to developing economies like China and India, which are growing much faster than the United States.
Industry Lags on Shareholder Returns
However, looking at shareholder returns over the past year, it appears that the ongoing trade tension between the United States and China has been dampening the sentiment of investors in the Instruments - Scientific industry.
The Zacks Instruments - Scientific 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 climbed 0.8%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 13.2% and 16.8%, respectively.
One-Year Price Performance
Stretched Valuation a Concern
Moreover, the Instruments - Scientific industry’s valuation looks stretched at the moment. One might get a good sense of 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 21.29, which is close to the highest level over the past year.
The space also looks expensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 17.11 and the median level is 18.29.
Price/ Earnings Forward 12 Months
Moreover, a comparison of the group’s P/E ratio with that of its border sector ensures that the group is trading at a huge premium. The Zacks Computer And Technology Sector’s forward 12-month P/E ratio of 19.52 and the median level of 20.50 for the same period are way below the Zacks Instruments - Scientific Industry’s respective ratios.
Price/Earnings Forward 12 Months
Underperformance May Continue Due to Dim Earnings Outlook
The ongoing trade tensions between the United States and China are expected to hurt shareholder returns in the near term. Notably, most of the companies that form the Instruments – Scientific industry have significant exposure to China.
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 Instruments - Scientific 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 Instruments - Scientific 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 $4.30 EPS estimate for the Zacks Instruments - Scientific industry for 2018 is not the actual bottom-up EPS estimate for every company in it, 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 $4.30 EPS estimate for 2018 has remained steady from the end of April, but increased from $4.26 at the end of March. In other words, the sell-side analysts covering the companies in the Zacks Instruments - Scientific industry have been proactive in raising their estimates.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Solid Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term.
The Zacks Instruments - Scientific industry currently carries a Zacks Industry Rank #70, which places it at the top 27% of more than 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.
Long-Term Growth Prospects Strong
The long-term (3-5 years) EPS growth estimate for the Zacks Instruments - Scientific industry appears promising. The group’s mean estimate of long-term EPS growth rate has increased since mid-October 2017 to reach the current level of 11.39%. This compares to 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
Instruments – Scientific industry’s long-term growth prospects are alluring. Demand for instruments and analytical measurement tools is expected to remain strong primarily due to strong growth in worldwide healthcare spending.
Pharma companies are focusing on rapidly growing areas like proteomics and phenomics, biopharma and applied, microbiology and diagnostics and neuroscience and cell microscopy, which present significant growth opportunity for the industry participants.
Moreover, the growth prospect in China is huge as regulators are attempting to upgrade the Chinese biopharma industry to global standards, resulting in strong demand for instruments.
These factors are expected to drive top-line growth that has gained significant momentum since the end of 2016.
Moreover, another indication of solid long-term prospects is the improvement in the group’s gross margin.
We believe strong growth prospects in emerging markets, increasing spending on healthcare driven by an aging demography and continued innovation in the pharma and life science end-market are key catalysts for this industry.
Despite stretched valuations, investors can build positions in the Instruments - Scientific industry based on the above-mentioned factors.
Currently, none of the stocks in the Instruments – Scientific industry sports a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
However, there are few stocks that investors can hold on to given the positive fundamentals and strong long-term growth prospects of the industry.
Waters Corporation (WAT - Free Report) - Milford, MA-based Waters carries a Zacks Rank #3 (Hold). The stock has returned 8.7% over the past year. The consensus EPS estimate for the company has remained steady at $8.21 for the current year, over the last 30 days.
Price and Consensus: WAT
Mettler-Toledo International (MTD - Free Report) - Headquartered in Polaris Parkway, Columbus, the weighing instruments provider also has a Zacks Rank #3. Its shares have lost 2.7% over the past year. Moreover, the consensus EPS estimate for the company has remained steady at $20.25 for the current year, over the last 30 days.
Price and Consensus: MTD
PerkinElmer (PKI - Free Report) - Headquartered in Waltham, MA, this Zacks Rank #3 stock has gained 9.1% over the past year. Moreover, the consensus EPS estimate for the company has remained steady at $3.61 for the current year, over the last 30 days.
Price and Consensus: PKI
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