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Manufacturing Machinery Industry Outlook: Gloomy Prospects

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The Zacks Electronics - Manufacturing Machinery industry comprises companies that provide a range of solutions to address the needs of wafer processing facilities as well as device packaging and test facilities of semiconductor manufacturing processes.

The solutions offered by the industry participants include thin-film processing systems, photonics, process control tools (that perform macro defect inspections and metrology), metal organic chemical vapor deposition, advanced packaging lithography, wet etch and clean, laser annealing, 3D wafer inspection systems.

A few industry participants also offer microcontamination control products and advanced materials handling solutions. These include initial production of process chemistry to transportation and dispensing onto a wafer. Notably, contamination-free transportation, storage and delivery of materials have gained immense significance in recent times.

  • Industry participants are benefiting from the ongoing transition in semiconductor manufacturing technology. The demand for advanced packaging that enables the miniaturization of electronic products remains strong. Consistent shift to smaller dimensions, rapid adoption of new device architectures like FinFET transistors and 3D-NAND along with increasing utilization of new manufacturing materials to increase transistor and bit density are driving demand for solutions provided by the industry players. Moreover, emergence of techniques like wafer level packaging (WLP) is anticipated to raise the need for a high purity manufacturing environment which is free of contaminants. The rising demand for clean processing as well as wafer carrier cleaning and conditioning tools is a key catalyst for the industry participants.
  • The requirement for faster, more powerful and more energy efficient semiconductors are expected to increase rapidly due to robust adoption of smartphones, cloud computing, Internet of Things (IoT) and artificial intelligence (AI). Semiconductor manufacturers are primarily aiming to maximize manufacturing yields at lower costs. This is actually increasing the complexity in semiconductor manufacturing processes and consequently driving demand for solutions offered by the industry participants. Moreover, the rapid adoption of IoT supported factory automation solutions is a contributing factor.
  • The trade war tensions between the United States and China are expected to have made an impact on industry participants. Per SEMI estimates, the second round of tariff imposed on $200 billion imports from China in September is expected to cost $500 million annually. The tariff includes semiconductor products used to manufacture wafers, flat panel displays, masks and chips. Moreover, weakness in the memory market (particularly NAND) due to oversupply and weaker-than-expected growth in end-market demand (primarily smartphones) is quite bothersome for a few of the industry participants.


Zacks Industry Rank Indicates Dim Prospects

The Zacks Electronics - Manufacturing Machinery industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #255, which places it in the bottom 1% of 256 Zacks industries.

The group’s Zacks Industry Rank, which is basically 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 outperforms 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 a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since May 31, 2018, the industry’s earnings estimates for the current year have decreased by 3.2%.

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 Lags on Shareholder Returns

The Zacks Electronics - Manufacturing Machinery industry has lagged the broader Zacks Computer and Technology sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 9.1% over this period compared to the S&P 500’s rally of 4.8% and the broader sector’s rise of 2.5%.

One-Year Price Performance

 


Industry’s Current Valuation

On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Electronics - Manufacturing Machinery companies, we see that the industry is currently trading at 6.93X compared with the S&P 500’s 10.75X. It is also below the sector’s trailing-12-month EV/EBITDA of 10.10X.

Over the last five years, the industry has traded as high as 15.05X, as low as 6.29X and at the median of 10.94X, as the chart below shows.

EV/EBITDA Ratio (TTM)

 


Bottom Line

We believe strong capital spending on advancement of equipment by semiconductor manufacturers is a positive for industry participants.

Apart from semiconductor capital equipment market, the solutions of the industry providers are also in high demand in adjacent markets like industrial technologies, life & health sciences as well as research & defense markets. This is another major growth driver.

None of the stocks in the Zacks Electronics - Manufacturing Machinery industry carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

However, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.

Intevac, Inc. (IVAC - Free Report) — Santa Clara, CA-based company has lost 34% in the past year. The Zacks Consensus Estimate of a loss of 22 cents for the current year has remained steady over the last 30 days.

Price and Consensus: IVAC

 


Nikon Corp (NINOY - Free Report) — Tokyo-based Nikon has lost 19.7% in the past year. The consensus EPS estimate for the current year has remained at $1.31 over the last 30 days.

Price and Consensus: NINOY

 

Veeco Instruments, Inc. (VECO - Free Report) — Headquartered in Plainview, NY, the stock has lost 39.6% in the past year. However, the consensus EPS estimate for the current year has remained unchanged at 30 cents over the last 30 days.

Price and Consensus: VECO

 
 

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