Companies in the Zacks
Instruments – Control industry are experiencing severe volatility in the regional markets due to the pandemic. High debt burden, forex woes, and stiff competition from low-cost suppliers, primarily based in China, along with seasonality factors pose challenges. Supply chain disruptions, stretched lead times, and higher material costs have hurt the instrumentation market. Nevertheless, Watts Water Technologies ( WTS Quick Quote WTS - Free Report) , Allied Motion Technologies ( AMOT Quick Quote AMOT - Free Report) , and Transcat ( TRNS Quick Quote TRNS - Free Report) are expected to benefit from energy efficiency and the adoption of industrial automation. In the United States, process manufacturing is driven by the replacement of obsolete industrial control systems with state-of-the-art technologies. Industry Description
The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems that are used in a wide range of industries. These companies deliver sophisticated flow measurement, control, and communication solutions for air, water, and other forms of gas and liquid used for commercial and residential purposes. The companies offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry. Some industry players offer heating, ventilation, and air conditioning products. These include water heaters and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. Few firms provide water re-use products, consisting of drainage and rainwater harvesting solutions.
What's Shaping the Future of Instruments - Control Industry
The industry players are still facing significant supply chain challenges that are resulting in stretched lead times and higher material costs. The pandemic continues to affect their markets, customers, and suppliers. While the companies are focused on improving their operating performance, an inability to obtain adequate supplies of raw materials and product parts at favorable prices could hurt their businesses. Though market uncertainties seem to have eased to some extent, these firms continue to closely monitor supply chain issues and inflation. They remain focused on long-term strategic priorities while addressing lingering near-term disruptions. Supply Chain Disruptions Remain a Concern: The companies operate in markets that are highly susceptible to competitive pressures and are under constant threat by low-cost suppliers, primarily based in China. Any change in prices could result in reduced demand of their products globally. Due to an international footprint, these firms are exposed to foreign exchange fluctuations that could affect their cash flow and profitability. Growth depends on their capability to develop technologically advanced products that meet appropriate industry standards. Changes in competitive conditions, including factors like the availability of the latest products and services, introduction of new channels of distribution, and changes in OEM and aftermarket pricing could hamper their association with clients and affect sales. Intense Competition Hurts Profitability: Increasing focus on adopting automation across all industry verticals and spending more on cutting-edge technologies should drive growth in the long run. North America is expected to continue dominating the market in terms of adopting automation. Moreover, rising infrastructural investments in the energy and power sector, increasing demand for food and beverages, along with favorable government policies, are tailwinds. The process automation and instrumentation market for the pharmaceutical industry is also witnessing significant growth due to a changing regulatory environment. An emphasis on high-quality equipment suggests buyer maturity and willingness to partner with process control industry players. Process Automation a Silver Lining: Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Instruments – Control industry is housed within the broader Zacks
Computer and Technology sector. It currently has a Zacks Industry Rank #236, which places it in the bottom 6% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s position in the bottom 50% of the Zacks-ranked industries is an outcome of a negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for the current year have decreased 1.3% since July-end. Before we present a few instruments control 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 Sector, S&P 500
The Zacks Instruments – Control industry has outperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite in the past year.
The industry has gained 36.3% compared with the S&P 500’s rise of 32.2%. The broader sector has risen 35.7% in the same period. One-Year Price Performance
Industry's Current Valuation
The Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing instruments control stocks. The industry has a trailing 12-month EV/EBITDA of 14.09X compared with the S&P 500’s 16X. It is also below the sector’s trailing 12-month EV/EBITDA of 15.77X.
Over the past five years, the industry has traded as high as 17.07X, as low as 6.54X with a median of 11.27X, as the chart below shows. Enterprise Value-to-EBITDA Ratio (Past Five Years)
3 Instruments Control Stocks to Watch
Watts Water Technologies: Headquartered in North Andover, MA, Watts Water provides one of the broadest plumbing, heating, and water quality product lines in the world. The company is focused on enhancing organic growth, driving margin expansion, and reinvesting in productivity initiatives. It continues to benefit from aggressive cost reduction actions and a strong balance sheet. The Zacks Consensus Estimate for its current-year earnings has been revised 10% upward over the past 90 days. The stock has gained 58.3% in the past year. It currently carries a Zacks Rank #3 (Hold). Price and Consensus: WTS Allied Motion Technologies: Headquartered in Amherst, NY, Allied Motion manufactures precision and specialty controlled motion products and solutions for the global market. The company is known for its expertise in electro-magnetic, mechanical and electronic motion technology. Its major served markets include Vehicle, Medical, Aerospace and Defense, and Industrial. The consensus estimate for its current-year earnings has been revised 7.9% upward over the past 90 days. The stock has returned 12.3% in the past year. It carries a Zacks Rank #3. Price and Consensus: AMOT Transcat: Headquartered in Rochester, NY, Transcat is a leading provider of accredited calibration, repair, inspection, and laboratory instrument services. It operates in two segments — Service and Distribution. The company is focused on providing best-in-class services and products to highly regulated industries, particularly the Life Science industry. It also operates as a leading value-added distributor that sells and rents proprietary brand instruments to customers, primarily in North America. Transcat is leveraging the complementary nature of its operating segments, service capabilities, and distribution platform to drive organic sales growth. The consensus estimate for its current-year earnings has been revised 21.1% upward over the past 90 days. The stock has soared 156% in the past year. It carries a Zacks Rank #3. Price and Consensus: TRNS