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Drab Near-Term Prospects for Scientific Instruments Industry

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The Zacks Instruments - Scientific industry comprises companies offering scientific instruments, analytical tools, diagnostic solutions, precision instruments & services, and test & sensor solutions. Major industry participants are Mettler-Toledo International (MTD - Free Report) , PerkinElmer (PKI - Free Report) and Waters Corporation (WAT - Free Report) .

The primary end-markets served by the industry participants are life science research in academia, medical schools and government, pharmaceuticals and biotechnology, microbiology and diagnostics, nanotechnology, and materials science research. A few companies also serve the food and nutritional safety, biochemical, and industrial spaces.

Most of the industry participants are under stringent regulatory scrutiny worldwide. They have to adhere to the U.S. Food and Drug Administration (FDA) norms as well as rules set by other global regulatory bodies for serving highly regulated end-markets like life sciences and pharma.

Here are the four major themes in the industry:

  • Industry participants are bearing the brunt of coronavirus (COVID-19)-induced macroeconomic woes and the heightened fears of a prolonged recession. As university research laboratories as well as applied and industrial labs globally remain closed due to lockdowns and physical distancing, demand for instruments sees a sudden collapse. Timing of the demand recovery is also indefinite. Moreover, coronavirus is expected to leave an adverse impact on operations, supply chains and distribution systems, which doesn’t bode well for the industry participants.
     
  • The industry is benefiting from strong end-market demand, particularly from the life science, pharmaceutical and academic markets. Increasing demand for generic drugs and biosimilars is driving growth for scientific tool and apparatus providers. Additionally, pharma companies are focusing on rapidly growing areas like proteomics and phenomics, biopharma and applied, microbiology and diagnostics, and neuroscience and cell microscopy, which creates significant demand for the instruments provided by industry participants.
     
  • Socioeconomic factors like an aging demography and increasing environmental regulations are driving demand for scientific measurement solutions. Moreover, robust worldwide healthcare spending is a major growth driver. The 6% increase in the National Institute of Health (NIH) budget for fiscal 2020 also bodes well for this industry. NIH will now receive $41.46 billion including increases for each of the agency's institutes and centers.
     
  • Further, the industry is gaining from increasing exposure to developing economies like China and India. Prospects in China are huge as regulators are attempting to raise the country’s biopharma industry to global standards. Moreover, efforts to improve the drug development process and production quality in the country are noteworthy. These factors are resulting in strong demand for instruments. However, any undesirable turn in the recent trade spat between the United States and China will not augur well for some of the industry players.


Zacks Industry Rank Indicates Dim Prospects

The Zacks Instruments - Scientific industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #152, which places it at the bottom 40% 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 cloudy 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.

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 Lags Sector and S&P 500

The Zacks Instruments – Scientific industry has underperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.

The industry has lost 17.2% over this period compared with the S&P 500’s decline of 3.7% and against the broader sector’s rally of 3.3%.

One-Year Price Performance

 


Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing scientific instrument stocks, we see that the industry is currently trading at 22.72X compared with the S&P 500’s 20.16X and the Zacks Computer and Technology sector’s 22.52X.

Over the last five years, the industry has traded as high as 26.74X, as low as 18.41X and at the median of 22.31X, as the chart below shows.

Forward 12-Month Price-to-Earnings (P/E) Ratio

 


Stocks to Consider

Solid emerging market prospects, increasing spending on health care driven by an aging demography, and continued innovation in the pharma and life sciences end-market are the key catalysts for this industry.

However, the coronavirus-led demand downturn for instruments is a major headwind, at least in the near term.

Currently, none of the stocks in the Zacks Instruments – Scientific industry flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Holliston, MA-based Harvard Bioscience (HBIO - Free Report) , which has a Zacks Rank #2 (Buy), is well positioned to grow in the near term. This scientific instrument provider has returned 37.1% in the past year. Moreover, the Zacks Consensus Estimate for 2020 earnings has stayed at 23 cents over the past 30 days.

Price and Consensus: HBIO
 

 

We also present a couple of stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolios.

Columbus, OH-domiciled Mettler-Toledo International has lost 9.2% in the past year. Moreover, the Zacks Consensus Estimate for the company’s current-year earnings has moved 5.7% south to $22.07 per share over the past 30 days.

Price and Consensus: MTD



 

Waltham, MA-headquartered PerkinElmer has lost 10% in the past year. The consensus mark for the company’s current-year earnings has been revised 8.5% downward to $3.55 per share over the past 30 days.

Price and Consensus: PKI


 

 

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