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Electronics Measuring Instruments Outlook: Solid Demand Ahead

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The Zacks Electronics – Measuring Instruments Industry comprises companies offering wearables, test solutions and equipment, metrology solutions, and thermo management products among others.

The industry is benefiting from the growing proliferation of electronic devices in every major sector, namely consumer, automobile, industrial, aerospace & defense, and communications.

The fitness and wellness tracker along with smart watches are coming mainstream due to their enhanced usage in monitoring personal health. Moreover, increasing adoption of flat panel display (FPD) technology in the healthcare sector is creating huge demand for measuring equipment.

Also, increasing usage of tracking meters and navigation devices in smart and connected cars are driving growth for industry participants. Moreover, strong demand for testing solutions in satellites, radar and surveillance system is a key catalyst.

Further, growing adoption of Augmented Reality (AR)/Virtual Reality (VR) devices and OLED displays is playing a significant role in driving the demand for FPDs. Additionally, technological advancement, such as building of 5G stations, in the communication sector, remains a tailwind.

Industry Returns to Positive Territory

Electronics, which helps in the efficiency and automation of any work, is ubiquitous. We believe the near-term growth prospects are bright given increased spending by manufacturers of semiconductors, automobiles, machineries, mobile phones and LED displays.

The Zacks Electronics – Measuring Instruments Industry, within the broader Zacks Computer And Technology Sector, has outperformed both the S&P 500 and its own sector in the past year.

While the stocks in this industry have collectively gained 38.2% over the past year, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector, have rallied 16.7% and 20.6% over the same time period, respectively.

One-Year Price Performance


Electronics – Measuring Instruments Stocks Trading Cheap

The Zacks Electronics – Measuring Instruments industry has mostly growth companies, which call for increased spending on research & development. Sales & marketing costs are also high, thereby denting profits.

However, an increase in revenues indicates the growing demand for the products of these players.

One might therefore get a handle on the industry’s relative valuation by looking at its price-to-sales ratio (P/S), which essentially shows how much an investor is willing to pay for each unit of sales.

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

The Electronics – Measuring Instruments industry’s valuation looks cheap at the moment. The industry currently has a TTM P/S ratio of 2.78X, which looks inexpensive when compared with the market at large, as the TTM P/S ratio for the S&P 500 is 3.43X.

Price-to-Sales Ratio (TTM)


Moreover, a comparison of the group’s P/S ratio with that of its broader sector shows that the group is trading at a significant discount. The Zacks Computer And Technology Sector’s TTM P/S ratio of 3.68X and the one-year median level of 3.54X are way above the Zacks Electronics – Measuring Instruments Industry’s respective ratios.

Price-to-Sales Ratio (TTM)


Improving Earnings Outlook to Drive Outperformance

Nevertheless, strong industry fundamentals and expectation of solid top-line growth are likely to generate positive 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 of 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. It also shows the industry's aggregate stock market performance.

Price and Consensus: Zacks Electronics – Measuring Instruments 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.

The consensus earnings estimate for the Zacks Electronics – Measuring Instruments industry is pegged at $1.22 per share. Moreover, the estimate has shown improvement since March 2018. In other words, the buy-side analysts covering the companies in this particular industry have been optimistic about 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 continued outperformance in the near term.

The Zacks Electronics – Measuring Instruments industry currently carries a Zacks Industry Rank #39, which places it at the top 15% of 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 continuously improved over the past five weeks.


Long-Term Growth Prospects Strong

The emergence of IoT services and 5G technology holds long-term promises as electronic devices form the very fulcrum of their existence.

The industry is expected to remain a positive track owing to strong efforts made toward the ongoing modification of the Internet infrastructure, evolution of smart cars & self-driving vehicles and robust demand for IoT supported factory automation in the industrial sectors.

The long-term (3-5 years) EPS growth estimate for the Zacks Electronics – Measuring Instruments industry appears promising. The group’s mean estimate of long-term EPS growth rate has been going up since May 2018 to reach the current level of 14.08%. This compares to 9.8% for the Zacks S&P 500 composite.

Mean Estimate of Long-Term EPS Growth Rate


Additionally, revenues have shown a marked improvement since 2013. The growth can be attributed to the emergence of the digital world, which has accelerated the use of electronics in every sector.


Bottom Line

The near-term growth prospect for the Zacks Electronics – Measuring Instruments is encouraging for investors. Robust demand in the consumer sector for connected appliances, flat panel display and test solutions are key catalysts.

Further, ongoing technical advancement in the telecommunication sector and increasing need for security and surveillance system and satellites are acting as tailwinds to the industry. Also, growing adoption of Internet, calls for the development of Internet infrastructure, which is heavily reliant on this industry.

Below are two stocks that carry a bullish Zacks Rank that we would recommend for investments in this industry.

Mount Laurell, NJ-based InTest Corporation (INTT - Free Report) offers thermal management products and ATE interface solutions, which cater to the needs of the semiconductor industry in the development and testing of integrated circuits. The company sports a Zacks Rank #1 (Strong Buy) and has an average four-quarter positive earnings surprise of 56.2%.

Price and Consensus: INTT

KeySight Technologies (KEYS - Free Report) based in Santa Rosa, CA, is a provider of electronic design and test instrumentation systems. The company serves the communication and electronic industries. It carries a Zacks Rank #2 (Buy) and has an average four-quarter positive earnings surprise of 10.4%.

Price and Consensus: KEYS

Below are two stocks from the same space with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fitbit (FIT - Free Report) , based in San Francisco, specializes in wearable activity tracking devices that record personal data, including the number of steps taken, distance traveled, calories burned, and other wellness related metrics. It delivered an average positive surprise of 42.8% in the trailing four quarters.

Price and Consensus: FIT


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