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2 Office Equipment Stocks to Watch in a Prospering Industry

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The Zacks Office Automation and Equipment industry is suffering from supply-chain disruption as well as a shortage of components. Macroeconomic slowdown, a high rate of Inflation and heightened price competition are hurting industry participants. Nevertheless, participants like Canon (CAJ - Free Report) and Seiko Epson (SEKEY - Free Report) are gaining from growing demand for medical and industrial equipment systems as well as the low-mid class of printers amid continued work-from-home demand. Strong capital spending on lithography equipment for memory devices and sensors has been benefiting industry participants. The rapid adoption of Internet of Things and 5G technologies has driven sales of CMOS sensors and communication devices, which bode well for these companies.

Industry Description

The Zacks Office Automation and Equipment Industry comprises companies that provide products and services related to e-commerce, shipping, digital delivery, printing, digital cameras, healthcare and industrial businesses. The industry participants are located primarily in Japan and the United States. The industry has been witnessing rapid evolution with the advancement in Internet and printing technology. Change in customer preference from monochrome to color products and from hardware to services and solutions has been noteworthy. Companies like Canon are launching new full-frame mirrorless products amid declining demand for SLR cameras. The industry participants cater to a broad market from Small Office Home Office (SOHO) and Small and Midsize Business (SMB) to large enterprises. The work and learn-from-home trend has been beneficial for industry participants.

3 Trends Shaping the Future of the Office Automation and Equipment Industry

Hybrid Working to Aid Demand: Increasing preference for the hybrid working model is driving demand for printers at homes and offices. Hybrid working essentially means increased office attendance compared with full-fledged remote working. Industry participants expect print volume to recover, driven by economic re-opening and higher office attendance.

Supply-Chain Constraints Hurting Growth: Companies in the industry are suffering as a result of production and supply-chain constraints. Inflation and concerns about an economic downturn are major headwinds for industry participants. Additionally, increased product offerings from local manufacturers, along with their low-cost alternatives, are forcing industry participants to slash prices. This is eating into the industry participants’ bottom line.

Sluggish Demand for Office Equipment Mars Prospects: Soft demand for copiers and office equipment due to the increasing adoption of smartphones and portable devices has been detrimental to the industry’s growth. Heavy investments in technology to innovate and customize products specific to client requirements are dragging down margins. Additionally, with product life cycles being short, investments in research and development are increasing.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Office Automation and Equipment industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #92, which places it in the top 37% 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 bright 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 are optimistic about this group’s earnings growth potential. Since Sep 30, 2022, the industry’s earnings estimates for the current year have moved 24.8% north.

But before we present these stocks, it is worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms Sector and S&P 500

The Zacks Office Automation and Equipment industry has outperformed the Zacks S&P 500 composite and its own sector in the past year.

The industry is down 3.8% over this period against the Zacks Computer and Technology sector’s decrease of 29.7% and the S&P 500’s decline of 14.1%.

One Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Office Automation and Equipment stocks, the industry is currently trading at 10.06X compared with the S&P 500’s 17.07X and the sector’s 20.98X.

Over the past five years, the industry has traded as high as 24.13X and as low as 9.19X, recording a median of 15.28X, as the chart below shows.

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

2 Stocks to Watch Right Now

Canon: This Zacks Rank #3 (Hold) is suffering from supply-chain issues that are now expected to delay the recovery in printing equipment output volume. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, fragile economic recovery, the negative impact of the Russia-Ukraine conflict and higher inflation levels are significant risks for Canon.

However, Canon’s focus on expanding its new businesses – medical-industrial equipment and commercial printing – is expected to drive growth in the long haul.

Tokyo, Japan-based Canon has lost 4.33% year to date. The Zacks Consensus Estimate for its current-year earnings has declined 1.9% to $2.06 per share over the past 30 days.

Price and Consensus: CAJ

 

Seiko Epson: Suwa, Japan-based Seiko also has a Zacks Rank #3. The company is riding on strong demand for high-capacity ink tank printers, ink cartridge printers, projectors and robots. Moreover, its growing footprint in commercial and industrial printing is noteworthy.

However, macroeconomic headwinds and supply-chain constraints are expected to drag down profitability in the near term.

The stock has lost 16.8% year to date. The Zacks Consensus Estimate for Seiko’s current-year earnings has remained stable at 80 cents per share over the past 30 days.

Price and Consensus: SEKEY



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