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Outlook for Office Automation and Equipment Industry Dull

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The Zacks Office Automation and Equipment Industry comprises companies that provide products and services related to printing solutions, healthcare and industrial businesses to name a few. Companies in the Zacks industry are domiciled in Japan and the United States.

Here are the three major themes in the industry:

  • Industry participants are suffering from slowdown in economic growth due to uncertainty surrounding the ongoing U.S.-China trade tensions. The trade tensions have lowered consumer spending and capital investments, which ultimately affected demand from emerging markets. As the companies in the industry have significant exposure to China and Southeast Asia, a lot depends on the outcome of US-China trade talks. After the Mar 1 deadline, tariffs on Chinese imports will rise from 10% to 25%. Notably, the companies in the industry generate significant revenues and most of their hardware is produced from these regions. Moreover, Brexit in the European Union (EU) with UK set to leave the EU on Mar 29 may change the dynamics of trade including more tariffs. This may hamper external demand conditions at least in the near term.
  • Additionally, soft demand for copiers and office equipment due to increasing adoption of smartphones and portable devices has been detrimental for the industry’s growth. Heavy investments in technology to innovate and customize products specific to client requirements is dragging down margins. Additionally, with product life cycles being short, investments in research and development are increasing. Moreover, commodity prices are likely to increase in the near term due to growing demand and concerns over tightening global supplies.
  • Increased product offerings from local manufacturers along with their low-cost alternatives are forcing industry participants to reduce prices. This is taking a toll on their bottom line. However, growing demand for advanced medical care techniques in both developed and emerging markets is boosting demand. Moreover, extensive use of robotics in industrial automation processes to improve precision and accuracy of products and production lines is resonating well with participants providing services in this area.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Office Automation and Equipment industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #175, which places it in the bottom 32% 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 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 positioning 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 24.3%.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 & Sector

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

The industry has declined 21.9% over this period compared with the Zacks Computer and Technology sector’s decline of 1%. The S&P 500 has however rallied 2.3% in the said time frame.

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 for valuing Office Automation and Equipment stocks, the industry is currently trading at 14.28X versus the S&P 500’s 16.87X and the sector’s 19.56X.

Over the past five years, the industry has traded as high as 19.81X and as low as 12.32X, recording a median of 15.16X, as the charts below show.

Price/Earnings F12M



Bottom Line

Softness in demand due to the ongoing trade tensions between the United States and China and EU turmoil along with intense competition from local players is expected to hurt the industry.

None of the stocks in the industry carries a Zacks Rank #1 (Strong Buy). However, we are presenting three stocks one with a Zacks Rank #2 (Buy) and two with a Zacks Rank #3 (Hold) that investors may choose to pick. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ricoh Co. (RICOY - Free Report) : Tokyo, Japan based Ricoh has a Zacks Rank #2. The stock has lost 1% in the past year. The Zacks Consensus Estimate for the company’s current-year EPS has remained stable at 81 cents per share over the past 30 days.

Price and Consensus: RICOY



 

Seiko Epson Corp. (SEKEY - Free Report) : Suwa, Japan-based Seiko has a Zacks Rank #3. The stock has lost 21.1% in the past year. The Zacks Consensus Estimate for the company’s current-year EPS has remained stable at 70 cents per share over the past 30 days.

Price: SEKEY



Canon, Inc. (CAJ - Free Report) : Tokyo, Japan based Canon has a Zacks Rank #3. The stock has lost 20.7% in the past year. The Zacks Consensus Estimate for the company’s current-year EPS has increased 3.2% to $1.93 over the past 30 days.

Price and Consensus: CAJ



 

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