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 around the world. These companies provide sophisticated flow measurement, control and communication solutions, which include air and water as well as other forms of gas and liquid for commercial and residential applications.
They offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry. Some firms within this industry sell products to end customers and original equipment manufacturers in vehicle, medical, aerospace and electronics markets through direct sales force as well as via authorized manufacturers’ representatives and distributors.
Some of the companies also provide heating, ventilation, and air conditioning and gas products. These comprise boilers, water heaters, heating solutions, and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. In addition, few companies within the industry offer drainage and water re-use products, consisting of drainage products and rain water harvesting solutions for industrial, marine and residential applications.
Let’s take a look at the industry’s three major themes:
• Gradual shift in production approach from conventional to digitized methods, largely driven by the growing adoption of Internet of Things across industries and rising labor wages in major manufacturing hubs, has provided an impetus to the process automation and instrumentation control market globally. With the recovery of some key end markets and improved macroeconomic climate in the second half of 2018, the market is expected to thrive in 2019 and beyond.
• The United States holds a dominant position in the global industrial control for process manufacturing. The industry is being driven by continually increasing demand for energy-efficient production processes, safety and security concerns and software systems that anticipate failure at a granular level, resulting in better monitoring and helping in predictive maintenance of the system. The market consists of a number of regional instrument companies that offer quality equipment with excellent aftersales services.
• Analytical instruments have little scope for differentiation, and major analytical equipment manufacturers have started following strategies such as forming alliances with other vendors or acquiring competitors to enhance top-line growth. The market is mainly dependent on R&D investments, and as the local vendors lack the huge capital to spend on R&D, they either exit the market or get acquired by well-established vendors. Most firms within the industry have to differentiate their products in order to sustain themselves in a highly competitive market.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #34, which places it at the top 13% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential. The industry’s earnings estimates for the current year have increased 8.3% over the past year.
Before we present a few instruments control stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outpaces 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 over the past year.
The industry has declined 0.6% over this period compared with the S&P 500’s fall of 1%. Meanwhile, the broader sector has lost 4.3%.
One-Year Price Performance
Industry’s Current Valuation
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 10.58X compared to the S&P 500’s 10.75X. It is trading above the sector’s trailing 12-month EV/EBITDA of 10.1X.
Over the past five years, the industry has traded as high as 13.79X, as low as 9.64X with the median of 11.28X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
The United States is a major market for factory automation and industrial control. The demand for advanced manufacturing robotic technologies will, to some extent, boost growth of the market in the region. The focus on building a high-end cyber-physical system to improve productivity by delivering connected, intelligent manufacturing systems capable of supporting high-levels of customization, flexibility and end-to-end manufacturing process automation will help the market grow.
Growth in industrial control for process manufacturing in the Americas is a result of replacement of current industrial control systems with modern technologies to bring in advanced processing solutions. The increased competitiveness among vendors and manufacturers is expected to improve growth prospects of industrial automation.
Other benefits include an increase in production capacity, minimized energy consumption, lower feedstock variability to downstream units, reduction in process setting time, faster modification of processes, improved process safety and increase in equipment reliability. The growing oil and gas industry of the Americas has also been responsible for this unprecedented growth as the industry requires advanced industrial controls for processing and manufacturing final products.
Two stocks in the space currently sport a Zacks Rank #1 (Strong Buy) that investors may consider betting on now. You can see the complete list of today’s Zacks #1 Rank stocks here.
Allied Motion Technologies Inc. (AMOT - Free Report) : This Amherst, NY-based instruments control firm has gained 59.4% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 11.4% upward over the past 90 days.
Price and Consensus: AMOT
Badger Meter, Inc. (BMI - Free Report) : Shares of this Milwaukee, WI-based instruments control firm have rallied 16.2% in the past year. The Zacks Consensus Estimate for the current fiscal-year earnings for this Zacks Rank #1 stock has moved up 5.6% in the past 90 days.
Price and Consensus: BMI
We are also presenting two stocks with a Zacks Rank #3 (Hold) that are well positioned to grow.
Watts Water Technologies, Inc. (WTS - Free Report) : The consensus estimate for this North Andover, MA-based instruments control firm’s earnings has improved 0.3% for the current fiscal year, over the past 90 days. The stock has returned 31% over the past three years.
Price and Consensus: WTS
Woodward, Inc. (WWD - Free Report) : This Fort Collins, CO-based instruments control firm has gained 55.8% over the past three years. The Zacks Consensus Estimate for the current-year EPS has been revised 2.2% upward over the past 90 days.
Price and Consensus: WWD
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