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2 Instruments Stocks Likely to Benefit From Industrial Digitization
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The Zacks Instruments – Control industry is expected to benefit from a diligent focus on energy-efficient production processes and integrated software systems. The rising demand for state-of-the-art technology to replace legacy industrial controls with automated products is likely to be commensurate with growth.
However, elevated customer inventory levels, high capital expenditures for infrastructure upgrades, price volatility and inflationary pressures may hinder the process automation and instrumentation market. Nevertheless, Sensata Technologies Holding plc (ST - Free Report) and Thermon Group Holdings, Inc. (THR - Free Report) are likely to gain from greater emphasis on energy efficiency, cost-cutting measures and broad-based endorsement 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. A few firms provide water reuse products, including drainage and rainwater harvesting solutions.
What's Shaping the Future of Instruments - Control Industry?
Focus on Digitized Technologies: The industry’s growth is driven mainly by the emphasis on digitized technologies in manufacturing activities, such as the Industrial Internet of Things. The demand for process automation, instrumentation products, safety automation systems and multivariable pressure transmitters for the fast-track manufacturing process is likely to fuel long-term growth opportunities. The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. Therefore, the rapid adoption of technology across various industries and growing regulation and compliance requirements 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 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 to companies to strengthen their market positions.
Depleting Margins: Material cost inflation, driven by persistent inflationary pressures, has been adversely impacting industry players’ margins. Transportation costs are also on the rise. Moreover, high raw material prices resulting from continued Middle East tensions, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the production schedules of various firms. While the companies are focused on improving their operating performances, the inability to obtain adequate supplies of raw materials and product parts at favorable prices is likely to hurt businesses. With firms being unable to pass on the entire increase in raw material prices to customers due to stiff competition, profitability is declining. High customer inventory levels and a conservative approach toward placing orders for high-value items remain headwinds. Price-sensitive competition for customer retention in the core business is expected to intensify in the coming days. Aggressive competition is likely to limit the ability to attract and retain customers and erode margins. Due to their international footprint, these firms are further exposed to foreign exchange fluctuations that affect their cash flows.
Thrust on Industrial Automation: A greater focus on increased adoption of automation across all industry verticals and higher investments in new technologies are 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 organic food and nutritional beverages and favorable government policies are aiding growth. The pharmaceutical industry's process automation and instrumentation market is also growing due to low-cost factors and an evolving regulatory environment. Focus on high-quality equipment indicates progressive buyer maturity and willingness to partner with process control industry players.
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 #54, which places it in the top 22% 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 bright 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 couple of Instruments – Control stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500, Sector
The Zacks Instruments – Control industry has lagged the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has gained 2.7% compared with the S&P 500 and the sector’s growth of 20.2% and 27.9%, 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 8.5X compared with the S&P 500’s 18.87X. It is also below the sector’s trailing 12-month EV/EBITDA of 19.71X.
Over the past five years, the industry has traded as high as 15.06X and as low as 7.43X, with a median of 9.46X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
2 Instruments Control Stocks to Buy
Sensata: Headquartered in Attleboro, MA, Sensata is a global industrial technology company that develops, manufactures and sells innovative sensor-based solutions. It is considered one of the leading suppliers of electrical protection and power management solutions. The company offers a streamlined set of products, which helps eliminate redundant costs and gives greater pricing flexibility. It invests in cutting-edge technology that enables hybrid and electric vehicles to be more efficient, cost-effective, robust and safe. The company is expanding its electrification ecosystem to facilitate the seamless transition to electric vehicles, aiming to be a leading provider of mission-critical sensor-rich hardware and software solutions. It has a long-term earnings growth expectation of 7.5% and delivered an earnings surprise of 4.2%, on average, in the trailing four quarters. It has a VGM Score of A. Sensata carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ST
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. This Zacks Rank #2 firm delivered an earnings surprise of 16.5%, on average, in the trailing four quarters. It has a VGM Score of B.
Price and Consensus: THR
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2 Instruments Stocks Likely to Benefit From Industrial Digitization
The Zacks Instruments – Control industry is expected to benefit from a diligent focus on energy-efficient production processes and integrated software systems. The rising demand for state-of-the-art technology to replace legacy industrial controls with automated products is likely to be commensurate with growth.
However, elevated customer inventory levels, high capital expenditures for infrastructure upgrades, price volatility and inflationary pressures may hinder the process automation and instrumentation market. Nevertheless, Sensata Technologies Holding plc (ST - Free Report) and Thermon Group Holdings, Inc. (THR - Free Report) are likely to gain from greater emphasis on energy efficiency, cost-cutting measures and broad-based endorsement 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. A few firms provide water reuse products, including drainage and rainwater harvesting solutions.
What's Shaping the Future of Instruments - Control Industry?
Focus on Digitized Technologies: The industry’s growth is driven mainly by the emphasis on digitized technologies in manufacturing activities, such as the Industrial Internet of Things. The demand for process automation, instrumentation products, safety automation systems and multivariable pressure transmitters for the fast-track manufacturing process is likely to fuel long-term growth opportunities. The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. Therefore, the rapid adoption of technology across various industries and growing regulation and compliance requirements 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 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 to companies to strengthen their market positions.
Depleting Margins: Material cost inflation, driven by persistent inflationary pressures, has been adversely impacting industry players’ margins. Transportation costs are also on the rise. Moreover, high raw material prices resulting from continued Middle East tensions, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the production schedules of various firms. While the companies are focused on improving their operating performances, the inability to obtain adequate supplies of raw materials and product parts at favorable prices is likely to hurt businesses. With firms being unable to pass on the entire increase in raw material prices to customers due to stiff competition, profitability is declining. High customer inventory levels and a conservative approach toward placing orders for high-value items remain headwinds. Price-sensitive competition for customer retention in the core business is expected to intensify in the coming days. Aggressive competition is likely to limit the ability to attract and retain customers and erode margins. Due to their international footprint, these firms are further exposed to foreign exchange fluctuations that affect their cash flows.
Thrust on Industrial Automation: A greater focus on increased adoption of automation across all industry verticals and higher investments in new technologies are 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 organic food and nutritional beverages and favorable government policies are aiding growth. The pharmaceutical industry's process automation and instrumentation market is also growing due to low-cost factors and an evolving regulatory environment. Focus on high-quality equipment indicates progressive buyer maturity and willingness to partner with process control industry players.
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 #54, which places it in the top 22% 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 bright 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 couple of Instruments – Control stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500, Sector
The Zacks Instruments – Control industry has lagged the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has gained 2.7% compared with the S&P 500 and the sector’s growth of 20.2% and 27.9%, 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 8.5X compared with the S&P 500’s 18.87X. It is also below the sector’s trailing 12-month EV/EBITDA of 19.71X.
Over the past five years, the industry has traded as high as 15.06X and as low as 7.43X, with a median of 9.46X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
2 Instruments Control Stocks to Buy
Sensata: Headquartered in Attleboro, MA, Sensata is a global industrial technology company that develops, manufactures and sells innovative sensor-based solutions. It is considered one of the leading suppliers of electrical protection and power management solutions. The company offers a streamlined set of products, which helps eliminate redundant costs and gives greater pricing flexibility. It invests in cutting-edge technology that enables hybrid and electric vehicles to be more efficient, cost-effective, robust and safe. The company is expanding its electrification ecosystem to facilitate the seamless transition to electric vehicles, aiming to be a leading provider of mission-critical sensor-rich hardware and software solutions. It has a long-term earnings growth expectation of 7.5% and delivered an earnings surprise of 4.2%, on average, in the trailing four quarters. It has a VGM Score of A. Sensata carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ST
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. This Zacks Rank #2 firm delivered an earnings surprise of 16.5%, on average, in the trailing four quarters. It has a VGM Score of B.
Price and Consensus: THR