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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. Optimism over the vaccine rollout is anticipated to aid the prospects of industry participants. Increasing spending on advanced technologies bodes well for industry participants like KLA Corp (KLAC - Free Report) , Carrier Global (CARR - Free Report) and Flex (FLEX - Free Report) . Continuing investments on data-center, high-performance computing (HPC) and 5G end-markets are key catalysts. Fab expansion in the United States, South Korea, Taiwan and China as well as higher spending on memory equipment is expected to drive growth in 2021 and beyond.

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. The industry is evolving on digital transformation and growing demand for silicon across multiple markets. Increasing cost of manufacturing bodes well for equipment suppliers while growing demand for silicon is a positive for semiconductor companies. 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, Garmin, Trimble 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 #77 which places it in the top 31% 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 Sep 30, 2020, the industry’s earnings estimate for the current year has moved up 22%.

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 & Sector

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

The industry has risen 66.8% during this period compared with the S&P 500 composite’s appreciation of 36.6% and the broader sector’s rally of 44.7%.

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 19.88X compared with the S&P 500’s 20.94X and the sector’s forward-12-month P/E of 27.64X.

Over the last five years, the industry has traded as high as 20.37X, as low as 10.22X and at the median of 15.31X, as the chart below shows.

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

Stocks to Consider

KLA Corp – This Zacks Rank #2 (Buy) company benefits from a strong process control market, revenue diversification and customer acceptance of key products. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, growing Foundry and Logic investments remain major positives. Additionally, enhanced wafer cleanliness and geometry specifications in the bare wafer market are driving demand for the company’s wafer products. Furthermore, high exposure to 5G infrastructure and the smartphone market is a positive. Markedly, transition to advanced nodes and the insertion of EUV lithography are expected to drive growth in the near future.

The stock has returned 37.7% year to date. The Zacks Consensus Estimate for its 2021 earnings has moved up 12.5% to $19.30 per share over the past 60 days.

Price and Consensus: KLAC

 

Carrier Global – The Palm Beach Gardens, FL-based company is gaining from encouraging demand for HVAC and robust refrigeration business. This Zacks Rank #2 company is gaining strong traction in the transport refrigeration space. Improving order intake in the fire & safety segments is a tailwind. Further, Carrier’s expanding portfolio of air purifier is a positive.

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

Shares have gained 37.1% on a year-to-date basis. The Zacks Consensus Estimate for Carrier’s current-year earnings has moved up 6.7% to $2.22 per share in 60 days’ time.

Price and Consensus: CARR

 

 

Flex – The Singapore-based company benefits from the ongoing recovery seen in the global automotive sector and improvement in core industrial markets. Flex’s diversified portfolio with increased focus on end-markets like 5G, converged enterprise and cloud bodes well. The company is also likely to gain from robust momentum seen in Artificial Intelligence (AI), augmented & virtual reality (AR/VR), Industrial automation, autonomous/connected cars and other upcoming technologies.

The stock is down 1.5% year to date. The Zacks Consensus Estimate for this Zacks Rank #2 company’s fiscal-year 2022 earnings has been revised 6.5% upward to $1.81 over the past 60 days.

Price and Consensus: FLEX