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3 Instruments Stocks Likely to Ride on Industrial Automation

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The Zacks Instruments – Control industry is likely to benefit from the increasing demand for state-of-the-art technology for replacing obsolete industrial control systems with automated products. In addition, a focus on energy-efficient production processes and integrated software systems is likely to be conducive to growth.

However, commodity price inflation amid a challenging macroeconomic environment might hurt the process automation and instrumentation market. Nevertheless, Badger Meter, Inc. (BMI - Free Report) , Thermon Group Holdings, Inc. (THR - Free Report) and Allied Motion Technologies, Inc. (AMOT - Free Report) are likely to gain from greater emphasis on energy efficiency and cost reduction, digitized technologies, adoption of industrial automation and optimum resource utilization.

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 reuse products, consisting of drainage and rainwater harvesting solutions.

What's Shaping the Future of Instruments-Control Industry

Differentiated IIoT Portfolio: The industry’s growth is largely driven by an emphasis on digitized technologies such as the Industrial Internet of Things (IIoT). The demand for process automation and instrumentation products is likely to benefit from the rise in manufacturing activities in the post-pandemic era. 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 include transmitters that primarily measure the pressure, flow, temperature, level and humidity of liquids and gases, which are essential for achieving optimum productivity. A differentiated product offering gives greater opportunities for companies to strengthen their market position.

Demand-Supply Imbalance: The industry players are facing continued supply chain challenges, resulting in stretched lead times and higher operating costs. Moreover, high raw material prices due to the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the production schedule of various firms. 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.

Precedence on Industrial 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 are 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.

Profitability Woes Persist: 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 largely operate in markets that are 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, the introduction of new distribution channels and changes in OEM and aftermarket pricing, are likely to hamper operations and affect sales.

Zacks Industry Rank Indicates Bullish Trends

The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #45, which places it in the top 18% 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 bullish 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, S&P 500

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

The industry has lost 6.8% compared with the S&P 500 and sector’s decline of 15.2% and 18.8%, 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 11.8X compared with the S&P 500’s 12.13X. It is above the sector’s trailing 12-month EV/EBITDA of 10.19X.

Over the past five years, the industry has traded as high as 17.47X, as low as 6.72X, with a median of 11.8X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

3 Instruments Control Stocks to Watch

Thermon: Headquartered in Austin, TX, Thermon provides engineered industrial process heating solutions for process industries worldwide. Its products include air heaters, boilers, controlling and monitoring solutions, heat tracing systems, tank heating systems, thermostats, tubing bundles, enclosure and explosion-proof gas catalytic heaters, gas-fired blowers and gas heating accessories that comprise regulators, valves, mounting brackets and battery cables. The buyout of Powerblanket has augmented Thermon's exposure to growing industrial and commercial end markets through its freeze protection, temperature control and flow assurance solutions. It has also enabled the company to expand into adjacent product lines and increase access to diversified end markets. The Zacks Consensus Estimate for its current-year earnings has been revised 25.6% upward over the past year, while that for the next year is up 64.1%. The stock has gained 49.7% in the past year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: THR

Badger Meter: Headquartered in Milwaukee, WI, Badger Meter provides flow measurement, control and communications solutions, serving water and gas utilities, municipalities and industrial customers worldwide. The company’s products measure water, oil, chemicals, and other fluids, and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data. With its industry-leading ORION Cellular endpoints, along with communication and software technologies, Badger Meter is focused on creating robust digital solutions to operationalize real-time data into actionable insights. Its BEACON software-as-a-service offering facilitates to collect and analyze data within the distribution network to improve operational awareness. The Zacks Consensus Estimate for current-year earnings for this Zacks Rank #2 (Buy) stock has been revised 4.9% upward over the past year. The stock has gained 19.3% in the past year.

Price and Consensus: BMI

Allied Motion: 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 electromagnetic, mechanical and electronic motion technology. Its major served markets include Vehicle, Medical, Aerospace and Defense and Industrial. Allied Motion 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 up 29.7% over the past year. It has a VGM Score of A. The stock has gained 21.8% in the past year. It carries a Zacks Rank #3 (Hold).

Price and Consensus: AMOT

See More Zacks Research for These Tickers

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

Thermon Group Holdings, Inc. (THR) - free report >>

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