The slowdown in manufacturing activities and the resultant softness in customer demand is weighing on the Zacks
Manufacturing - Electronics industry. Nevertheless, demand across key end markets continues to be strong. The industry participants’ focus on growing inorganically augurs well. Easing supply chain disruptions and an expected reduction in raw material costs, thanks to a deceleration in inflation, are other tailwinds for the industry. Despite the slowdown in the manufacturing sector, these factors paint a rosy picture for the industry in the near term. Amid the buoyancy in the industry, companies like ABB Ltd ( ABB Quick Quote ABB - Free Report) and A. O. Smith Corporation ( AOS Quick Quote AOS - Free Report) are poised for growth. About the Industry
The Zacks Manufacturing-Electronics industry comprises companies that manufacture electronic products like battery chargers, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls and motive power devices. Some industry players also provide water-treatment products, engineered flow components, process equipment and turn-key systems. These companies also offer state-of-the-art customer support and after-market services to end users. These companies are increasing investments in developing innovative technologies, boosting customer and employee experience as well as supply-chain modernization programs. The manufacturing electronic companies sell products and services in various end markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.
3 Trends Shaping the Future of the Manufacturing Electronics Industry
: Amid the Federal Reserve’s continued monetary policy tightening, the recent slowdown in manufacturing activities is weighing on customer demand in the industry. Per the Institute for Supply Management (ISM) report, manufacturing activities contracted for the second consecutive month in December. The Manufacturing Purchasing Manager's Index dipped 0.6 percentage point to Slowdown in Manufacturing Activities 48.4% last December, with a decline in New Orders Index and Production Index. A figure below 50 indicates a contraction in manufacturing activity. Industrial production decreased 0.7% in December, with a 1.3% decline in manufacturing output. The same fell 1.7% in the fourth quarter of 2022. Amid growing economic uncertainties as the Fed continues to hike interest rates to curtail inflation, customer demand is likely to remain depressed in the near term. : Despite a slowdown in manufacturing activities, robust demand across key end markets should keep the industry afloat. Well-diversified end-markets, such as gas, mining, refining, energy, renewable, life sciences, metals, electrification and automation, should help the industry players offset weakness in demand associated with a single market. Additionally, the digitalization of business operations is helping industry participants boost their competitiveness through enhanced operational productivity, product quality and better cost management. Inorganic growth strategies bode well for the industry’s prospects. Strength Across End-Markets : While electronic component shortages arising from supply chain disruptions persist, the situation has stabilized to some extent and lead times are gradually returning to normal. Easing supply chain disruptions should aid growth of the industry participants. Additionally, with inflation showing signs of deceleration, a reduction in raw material costs should lead to improvement in margins, which have been dented by high raw material costs lately. Easing Supply Chain Disruptions Zacks Industry Rank Indicates Solid Prospects
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks
Industrial Products sector, currently carries a Zacks Industry Rank #108. This rank places it in the top 43% of more than 250 Zacks industries. The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bullish 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 the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping more faith in this group's earnings growth potential. The industry’s earnings estimates for 2023 have increased 21.2% over the past year. Given the upbeat near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it is worth looking at the industry’s shareholder returns and its current valuation first. Industry Outperforms S&P 500, Lags Sector
While the Zacks Manufacturing – Electronics industry has outperformed the Zacks S&P 500 composite index in the past year, it has underperformed the sector.
Over this period, the industry has declined around 4% compared with the sector and S&P 500 Index’s decrease of 2.3% and 8.8% respectively. One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month Price-to-Earnings (P/E), which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 21.58X compared with the S&P 500’s 18X. It is also above the sector’s P/E ratio of 16.71X.
Over the past five years, the industry has traded as high as 26.63X, as low as 13.53X and at the median of 18.99X as the chart below shows. Price-to-Earnings Ratio Price-to-Earnings Ratio
2 Manufacturing - Electronics Stocks to Keep a Tab On
Both the stocks mentioned below carry a Zacks Rank #2 (Buy).
ABB: Headquartered in Zurich, Switzerland, ABB is a leading technology company operating in Europe, the Americas, Asia, the Middle East and Africa. Strong customer activity in the Electrification and Robotics & Discrete Automation segments bodes well for the company’s growth. Improved supply chains and the acquisitions of PowerTech Converter and Siemens' low voltage NEMA motor business should foster the company’s growth. The Zacks Consensus Estimate for ABB’s 2023 earnings has been revised upward by approximately 2% in the past 60 days. The stock has rallied 20.7% in the past six months. Price and Consensus: ABB
A. O. Smith: Headquartered in Milwaukee, WI, A. O. Smith is one of the leading manufacturers of commercial and residential water heating equipment, and water treatment products of the world. Growth in North America boiler sales due to pricing actions and strong demand for water heating and water treating products in India are key catalysts to the company’s growth. The June 2022 acquisition of Atlantic Filter, which has boosted AOS’ position in the water treatment industry, is expected to drive growth in 2023. The Zacks Consensus Estimate for A. O. Smith’s 2023 earnings has remained steady in the past 60 days. Shares of the company have gained 2.8% in the past six months. Price and Consensus: AOS