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3 Instruments Stocks Set to Ride on Energy-Efficient Processes

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The Zacks Instruments – Control industry is expected to benefit from the increasing demand for energy-efficient production processes, safety and security concerns and integrated software systems. Efforts to replace obsolete industrial control systems with state-of-the-art technology are likely to be conducive to growth.

However, disruptions in the supply chain and commodity price inflation hurt the process automation and instrumentation market. Nonetheless, Watts Water Technologies, Inc. (WTS - Free Report) , Badger Meter, Inc. (BMI - Free Report) and Allied Motion Technologies, Inc. (AMOT - Free Report) are likely to gain from precedence to energy efficiency and cost reduction, digitized technologies, adoption of industrial automation and the optimum utilization of resources.

Industry Description

The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems 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

High Commodity Price Inflation: Material cost inflation, resulting from incessant inflationary pressures, has affected margins in the near term. Transportation cost is also on the rise. With firms being unable to pass on the entire increase in raw material prices to customers due to stiff competition, profitability is mostly on the wane. The companies operate in markets susceptible to high competitive pressures and are under constant threat by low-cost suppliers, primarily based in China. Due to an international footprint, these firms are further exposed to foreign exchange fluctuations that affect their cash flows. Growth depends on their capability to develop technologically advanced products that meet appropriate industry standards. Changes in competitive conditions, including the availability of the latest products and services, introduction of new distribution channels and changes in OEM and aftermarket pricing, could hamper their association with clients and affect sales.

Focus on Process Automation: Increasing focus on adopting automation across all industry verticals and spending more on new technologies is expected to drive growth over the next few years. North America is expected to continue dominating the market in terms of adopting automation. Rising infrastructural investments in the energy and power sector, increasing demand for food and beverages, and favorable government policies are aiding the growth. The pharmaceutical industry's process automation and instrumentation market is also growing due to low-cost factors and a changing regulatory environment. Focus on high-quality equipment indicates increasing buyer maturity and willingness to partner with process control industry players.

Increasing Demand for Digitized Technologies: The industry’s growth is largely driven by an emphasis on digitized technologies such as the Industrial Internet of Things. The demand for process automation and instrumentation products is dependent on manufacturing activities. Moreover, the demand for safety automation systems and multivariable pressure transmitters is likely to provide significant growth opportunities. The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. So, the increase in adoption of technology across various industries and growing regulation and compliance will continue to be major growth drivers. In addition, field instruments play a significant role in process control by measuring the key elements such as temperature, pressure, flow and level in process industries such as chemicals, mining and pharmaceuticals. These consist of transmitters that primarily measure pressure, flow, temperature, level and humidity of liquid and gases, which are essential for achieving optimum productivity. A differentiated product offering gives greater opportunities for companies to strengthen their market position.

Supply Chain Disruptions Remain a Concern: The industry players are facing significant supply chain challenges, resulting in stretched lead times and higher material costs. Lockdown restrictions continue to affect 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.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #221, which places it in the bottom 12% 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 bleak 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.

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, Lags S&P 500

The Zacks Instruments – Control industry has outperformed the broader Zacks Computer and Technology sector but lagged the S&P 500 composite in the past year.

The industry has lost 20.5% compared with the S&P 500 and sector’s decline of 9.4% and 24.7%, respectively.

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 11.1X compared with the S&P 500’s 12.55X. It is above the sector’s trailing 12-month EV/EBITDA of 11.07X.

Over the past five years, the industry has traded as high as 17.47X, as low as 6.72X, with a median of 11.75X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

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 globally. The company is focused on enhancing organic growth, driving margin expansion and reinvesting in productivity initiatives. It benefits from aggressive cost reduction actions and a strong balance sheet. Watts Water aims to launch smart and connected products, which are likely to provide it with further differentiation in the marketplace. The company believes that the Asia-Pacific segment’s margin will expand primarily driven by higher volume. Furthermore, operating margin in the Americas segment will likely grow, driven by volume leverage and productivity initiatives. Watts Water expects that its pricing actions should also help to partly mitigate commodity inflation. The Zacks Consensus Estimate for its current-year earnings has been revised 22% upward over the past year, while that for the next year is up 24.6%. It has long-term earnings growth expectations of 8% and currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: WTS

Badger Meter: Headquartered in Milwaukee, WI, Badger Meter provides industry-leading water solutions, including flow measurement, quality and other system parameters. The company is focused on investing in digital solutions that operationalize real-time data into actionable insights. With industry-leading ORION Cellular endpoints, along with improved communication and software technologies, Badger Meter is likely to benefit from healthy order momentum across its diverse portfolio of innovative water solutions. Its BEACON software-as-a-service offering facilitates the collection and analysis of data within the distribution network to improve operational awareness. It is witnessing solid order traction for E-Series Ultrasonic meters and ORION Cellular LTE-M (Long-Term Evolution for Machines) radios. With smart alarms and pressure and temperature data, these products offer early detection of any anomaly in the system, thereby lowering maintenance and operating costs for utility firms. The consensus estimate for current-year earnings has been revised 6.4% upward over the past year. It carries a Zacks Rank #3 (Hold).

Price and Consensus: BMI

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 company is focused on being the controlled motion solutions leader in target markets by leveraging its technology to develop integrated precision solutions. The consensus estimate for current-year earnings has been stable over the past 30 days. It carries a Zacks Rank #3.

Price and Consensus: AMOT

In-Depth Zacks Research for the Tickers Above

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Badger Meter, Inc. (BMI) - free report >>

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Allied Motion Technologies, Inc. (AMOT) - free report >>

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