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4 Electronics Stocks Poised to Gain on Prospering Industry Trends

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The Zacks Manufacturing - Electronics industry is poised for growth on the back of improving supply-chain conditions. Despite a slowdown in manufacturing activities, strength across prominent end markets should help the industry stay afloat.

The growing adoption of advanced manufacturing technologies and processes bodes well for the industry participants. A surge in e-commerce activities is also likely to foster growth of the industry. Eaton Corporation plc (ETN - Free Report) , Zurn Elkay Water Solutions Corporation (ZWS - Free Report) , AZZ Inc. (AZZ - Free Report) and Powell Industries, Inc. (POWL - Free Report) are a few industry participants that might capitalize on the prevalent opportunities.

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 offer state-of-the-art customer support and after-market services to end users. The firms are increasing investments in developing innovative technologies, boosting customer and employee experience and 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.

Major Trends Shaping the Future of the Manufacturing Electronics Industry

Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector is denting demand in the industry. Per the Institute for Supply Management report, the Manufacturing PMI (Purchasing Manager’s Index) touched 48.7% in May 2024, reflecting a decline from 49.2% recorded in April. A figure less than 50% indicates a contraction in manufacturing activity. Also, the New Orders Index remained in the contraction territory at 45.4% in May, declining 3.7 percentage points from the figure recorded in April. The months of April and May registered a slowdown in orders compared with the beginning of the year, with weaker-than-expected readings on manufacturing and construction spending.

End-Market Strength & Technological Advancements: Despite a slowdown in manufacturing activities, demand across key end markets remains stable. Electronics manufacturers have been gaining from higher adoption of advanced manufacturing technologies and processes by original equipment manufacturers. The requirement for integrating advanced electronic components into machinery and electronic devices has supported the electronics manufacturing services market. With the gradual development of business models and cutting-edge technologies, several industry players have been banking on digitizing their business operations for a while now. Digitization is enabling industry participants to boost their competitiveness through enhanced operational productivity, product quality and better cost management.

Easing Supply-Chain Disruptions: While supply-chain disruptions persist, primarily related to the availability of electronic components, the situation has improved, as evident from the ISM report’s Supplier Deliveries Index, which reflected faster deliveries for the third consecutive month in May. Easing supply-chain issues should support manufacturing electronics companies’ growth in 2024. An anticipated reduction in raw material costs should aid the bottom line of manufacturing electronics companies. A surge in the e-commerce business also bodes well.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Manufacturing – Electronics industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #23. This rank places it in the top 9% 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 outperform 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 the current year have increased 3.5% in the past year.

Given the upbeat near-term prospects of the industry, we will present a few noteworthy stocks for your consideration. But it is worth looking at the industry’s shareholder returns and its current valuation first.

Industry Outperforms Sector & the S&P 500

The Zacks Manufacturing – Electronics industry has outperformed both the broader sector and the Zacks S&P 500 composite index in the past year.

Over this period, the industry has rallied 45.6% compared with the sector’s and S&P 500 Index’s growth of 23.7% and 23.4%, 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 26.06X compared with the S&P 500’s 20.90X. It is also above the sector’s P/E ratio of 18.20X.

Over the past five years, the industry has traded as high as 28.43X, as low as 14.73X and at the median of 22.16X, as the chart below shows.

Price-to-Earnings Ratio vs SP500

Price-to-Earnings Ratio vs Sector

4 Manufacturing - Electronics Stocks to Buy

AZZ: Headquartered in Fort Worth, TX, the company is engaged in providing metal coating services, welding solutions and specialty electrical equipment to a wide range of markets, primarily in North America. Higher volumes for hot-dip galvanizing within the renewables, utility, OEM, and construction markets should continue to boost the company’s top line. The company’s pricing actions and operational improvement initiatives have also been proving beneficial. AZZ sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of AZZ have skyrocketed 123.5% in the past year. The company reported better-than-expected results in each of the last three quarters, the average being 36%. The Zacks Consensus Estimate for its fiscal 2025 (ending February 2025) earnings has been revised upward by 5% in the past 60 days.

Price and Consensus: AZZ

Powell Industries: Headquartered in Houston, TX, the company is engaged in designing, manufacturing, and distributing custom-engineered equipment and systems. Strength across petrochemical, oil and gas, utility, commercial and other industrial end markets, along with a solid backlog, is a key catalyst behind this company’s growth. A strong pipeline of projects within the LNG market and higher activities related to energy transition projects are likely to drive its performance.

Shares of Powell Industries have soared 181.3% in the past year. The company reported better-than-expected results in each of the last three quarters, the average being 66.9%. The Zacks Consensus Estimate for Zacks Rank #1 company’s fiscal 2024 (ending September 2024) earnings has been revised upward by 19.9% in the past 60 days.

Price and Consensus: POWL

Eaton: Headquartered in Dublin, Ireland, this is a diversified power management company and a global technology leader in electrical components and systems. ETN is benefiting from improving end market conditions, increasing demand from the new AI data center, solid backlog level and product development initiatives through investments in research and development.

The Zacks Rank #2 (Buy) company’s shares have rallied 76.7% in a year. The company reported better-than-expected results in each of the last four quarters, the average being 4.7%. The Zacks Consensus Estimate for its 2024 earnings has been revised upward by 2.7% in the past 60 days.

Price and Consensus: ETN

Zurn Elkay Water Solutions: Based in Milwaukee, WI, the company is a designer, manufacturer and marketer of water management solutions primarily in the United States and Canada. ZWS is poised to gain from growing awareness of the need for clean, filtered drinking water, solid demand for its products and solutions and its focus on operational execution.

Shares of Zurn Elkay Water Solutions have jumped 27.3% in a year. The company delivered an earnings surprise of 10.3%, on average, beating estimates in each of the trailing four quarters. The Zacks Consensus Estimate for the Zacks Rank #2 company’s 2024 earnings has been revised upward by 2.6% in the past 60 days.

Price and Consensus: ZWS

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