The Zacks Electronics - Manufacturing Machinery industry comprises companies that provide a range of solutions to address the needs of wafer processing facilities as well as device packaging and test facilities of semiconductor manufacturing processes.
The solutions offered by the industry participants include thin-film processing systems, photonics, process control tools (that perform macro defect inspections and metrology), metal organic chemical vapor deposition, advanced packaging lithography, wet etch and clean, laser annealing, and 3D wafer inspection systems.
A few industry participants also offer microcontamination control products and advanced materials handling solutions. Notably, contamination-free transportation, storage and delivery of materials have gained immense significance in recent times.
- Industry participants are benefiting from the ongoing transition in semiconductor manufacturing technology. The demand for advanced packaging that enables the miniaturization of electronic products remains strong. Consistent shift to smaller dimensions, rapid adoption of new device architectures like FinFET transistors and 3D-NAND along with increasing utilization of new manufacturing materials to increase transistor and bit density are driving demand for solutions provided by the industry players. Moreover, emergence of techniques like wafer level packaging (WLP) is anticipated to raise the need for a high-purity manufacturing environment, free of contaminants. The rising demand for clean processing as well as wafer carrier cleaning and conditioning tools is a key catalyst for the industry participants.
- The requirement of faster, more powerful and more energy efficient semiconductors is expected to increase rapidly on robust adoption of cloud computing, IoT and AI. Semiconductor manufacturers like Intel (INTC - Free Report) , Samsung, Taiwan Semiconductors are primarily looking to maximize manufacturing yields at lower costs. This is actually making semiconductor manufacturing processes more complex and in turn driving demand for solutions offered by the industry participants. The rapid adoption of IoT-supported factory automation solutions is also a contributing factor. Further, increasing demand for 5G infrastructure is a key catalyst.
- Improving demand for particularly NAND and DRAM is a positive for the industry participants. Moreover, strong SSD demand and rising NAND pricing are key catalysts. DRAM is expected to benefit from strong demand in the data center, enterprise and cloud segments. Additionally, anticipated recovery in new equipment spending is a major positive.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Electronics - Manufacturing Machinery industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #83, which places it in the top 33% 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 solid 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 position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Sep 30, 2019, the industry’s earnings estimates for 2020 have moved up 4.6%.
Before we present a few 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 Beats on Shareholder Returns
The Zacks Electronics - Manufacturing Machinery industry has outperformed the broader Zacks Computer and Technology sector as well as the Zacks S&P 500 composite over the past year.
The industry has returned 60.6% over this period compared with the S&P 500’s rally of 25.6% and the broader sector’s gain of 32.7%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Electronics - Manufacturing Machinery companies, we see that the industry is currently trading at 16.30X compared with the S&P 500’s 12.01X. It is also below the sector’s trailing-12-month EV/EBITDA of 12.10X.
Over the last five years, the industry has traded as high as 16.47X, as low as 5.65X and at the median of 10.54X, as the chart below shows.
EV/EBITDA Ratio (TTM)
Capital spending on high-performing computing and advanced packaging by semiconductor manufacturers is expected to rise in 2020.
Apart from semiconductor capital equipment market, the solutions of the industry providers are in high demand in markets like industrial technologies, life & health sciences as well as research & defense. This is another major growth driver.
Here, we present a couple of stocks in the Zacks Electronics - Manufacturing Machinery industry that sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Poway, CA-based Cohu (COHU - Free Report) is a provider of semiconductor test and inspection handlers, micro-electro mechanical system (MEMS) test modules, test contactors and thermal sub-systems. The Zacks Consensus Estimate for its 2020 earnings stayed at $1.10 pr share over the past 30 days.
Price and Consensus: COHU
Plainview, NY-based Veeco Instruments (VECO - Free Report) is engaged in the design, development, manufacture and support of thin film process equipment, primarily sold to make electronic devices. The consensus mark for its 2020 earnings stayed at 76 cents over the past 30 days.
Price and Consensus: VECO