The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems that are used in a wide range of industries worldwide. These companies deliver sophisticated flow measurement, control and communication solutions, which include air, water and other forms of gas and liquid for commercial and residential uses. The firms offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry.

Some of the industry participants 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. In addition, a few firms within the ecosystem provide water re-use products, consisting of drainage products and rain water harvesting solutions for industrial, marine and residential applications.

Let’s take a look at the three major industry themes.

•    Business processes have largely evolved over the past decade or so and advanced technologies have been a major catalyst for change. As a result, companies are forced to deal with a variety of challenges (and opportunities), and success is largely dependent upon being able to adapt and overcome the barriers. As analytical instruments have little scope for differentiation, prominent equipment makers are following conventional strategies like forming alliances with other vendors or acquiring rivals to stay ahead of competition. The industry is primarily dependent on R&D activities, and as local players lack huge capital, they either exit the market or get acquired by well-established suppliers.

•    U.S.-based manufacturers face severe competition from across the world. China in particular has been a perennial concern as it can produce comparable products at lesser price tags. Most firms have to differentiate their products in order to reinforce their market share in a price-competitive environment. Intensifying competition results in loss of business and decline in average selling price of products. The ecosystem is also affected by the shift toward radio technology, with volatility in demand for replacement units.

•    Inadequate supply of raw materials and components at favorable prices has had a material negative impact on businesses, affecting timely deliveries to customers. The United States is a major market for factory automation and industrial control. But U.S. manufacturers often fail to compete with their offshore counterparts in terms of price due to labor cost differentials and government regulations. The federal government is adding new regulations and compliance issues that force suppliers to make adjustments, causing them to spend even more on monitoring compliance. Keeping abreast of regulations and managing compliance reporting is a huge challenge faced by the companies.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Instruments – Control industry, which has seven constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #214, which places it in the bottom 16% 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 dull near-term prospects. Interestingly, 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.

Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for the current year and the next have decreased 8% and 9.7%, respectively over the past year.

Before we present a few instruments control stocks that are well positioned to outperform the market (despite broader challenges) based on a healthy earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector, Outperforms S&P 500

The Zacks Instruments – Control industry has lagged the broader Zacks Computer and Technology sector but outpaced the S&P 500 composite over the past year.

The industry has gained 32.4% over this period compared with the S&P 500’s rise of 25.3%, while the broader sector has increased 33%.

One-Year Price Performance



Industry’s Current Valuation

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 12.87X compared with the S&P 500’s 11.99X. It is also above the sector’s trailing 12-month EV/EBITDA of 12.12X.

Over the past five years, the industry has traded as high as 14.12X, as low as 9.77X with the median of 11.65X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)



Bottom Line

The companies operating in this landscape are susceptible to near-term headwinds like pricing pressure, high R&D outlays and supply-chain inadequacies. Despite manufacturing challenges, the industry remains an important contributor to the U.S. economy. So, makers need to utilize the latest technology to stay relevant, innovative and competitive. Furthermore, companies need to look into systems that can support efficient operations, save costs and increase service levels. The biggest challenge is how to best implement IoT to achieve operational goals such as reducing costs, improving efficiency, supporting compliance and pushing product innovation.

None of the stocks in the industry currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). We are presenting three stocks with a Zacks Rank #3 (Hold) that investors may consider retaining in their portfolio based on their compelling fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.

Woodward, Inc. (WWD Quick QuoteWWD - Free Report) : Shares of this Fort Collins, CO-based control solutions maker for the aerospace and industrial markets have rallied 60.2% in the past year. The Zacks Consensus Estimate for its current-year earnings has been revised 4% upward over the past year. Woodward has a long-term earnings growth expectation of 13.1%. The company delivered average positive earnings surprise of 17.2% in the trailing four quarters, beating estimates thrice.

Price and Consensus: WWD



Thermon Group Holdings, Inc. (THR Quick QuoteTHR - Free Report) : Shares of this Austin, TX-based industrial process heating solutions provider have added 16.9% in the past year. The consensus estimate for its current-year earnings has moved up 5.5% over the past 90 days. The company delivered average positive earnings surprise of 7.3% in the trailing four quarters.

Price and Consensus: THR



Badger Meter, Inc. (BMI Quick QuoteBMI - Free Report) : Shares of this Milwaukee, WI-based flow measurement, control and communication solutions supplier have gained 23.8% in the past year. The Zacks Consensus Estimate for its current-year earnings has moved up 1.3% over the past 90 days.

Price and Consensus: BMI




5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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