For Immediate Release
Chicago, IL – December 27, 2023 – Today, Zacks Equity Research discusses Eaton Corp. plc ETN, Emerson Electric Co. EMR, A. O. Smith Corp. AOS and ESCO Technologies Inc. ESE.
Industry: Electronics Manufacturing
Link: https://www.zacks.com/commentary/2202093/4-stocks-to-gain-from-the-promising-manufacturing-electronics-industry
The Zacks Manufacturing - Electronics industry is poised for growth on the back of easing supply-chain disruptions. 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 Corp. plc, Emerson Electric Co., A. O. Smith Corp. and ESCO Technologies Inc. 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 companies 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 has been weighing on demand in the industry. Per the Institute for Supply Management's ("ISM") report, in November, the Manufacturing PMI (Purchasing Manager's Index) touched 46.7%, contracting for the 13th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity.
However, the manufacturing sector has been showing signs of gradual improvement. In November, the New Order Index increased 2.8 percentage points from October. The uptick in new orders, in conjunction with the easing of supply-chain disruptions, augurs well for the manufacturing electronics industry.
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.
Additionally, 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 has been 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, especially 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 14th straight month in November. Easing supply-chain issues should support manufacturing electronics companies' growth in 2023. Additionally, an anticipated reduction in raw material costs should aid the bottom line of manufacturing electronics companies. A surge in the e-commerce business has also proved beneficial.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #20. This rank places it in the top 8% 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 outperforms 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 1.6% 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 & Lags the S&P 500
While the Zacks Manufacturing – Electronics industry has outperformed the broader sector, it has lagged the Zacks S&P 500 composite index in the past year.
Over this period, the industry has rallied 22.3% compared with the sector and S&P 500 Index's growth of 13.7% and 25.5%, respectively.
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 22.67X compared with the S&P 500's 19.96X. It is also above the sector's P/E ratio of 17.23X.
Over the past five years, the industry has traded as high as 28.22X, as low as 13.90X and at the median of 21.48X.
4 Manufacturing - Electronics Stocks to Buy
Emerson Electric: Headquartered in St. Louis, MO, the company offers a wide range of products and services to customers in the consumer, commercial and industrial markets. EMR stands to benefit from strength in the measurement and analytical, and final control businesses, driven by strong demand in the hybrid and process end markets in the quarters ahead. Also, its robust backlog level and acquisitions are likely to boost its performance.
Although the company's stock has moved down 0.2% in the past year, it has gained 7.6% in the past six months. The Zacks Rank #1 (Strong Buy) company delivered an earnings surprise of 4.65%, on average, beating estimates twice in the last four quarters. Also, the company's earnings estimates have improved 6.4% for fiscal 2024 (ending September 2024) in the past 60 days. You can see the complete list of today's Zacks #1 Rank stocks here.
ESCO Technologies: Based in Saint Louis, MO, the company is a producer of engineered products and systems for industrial and commercial markets throughout the world. ESE is poised to gain from strength in its commercial and defense aerospace end markets, solid orders and backlog, and its focus on operational execution.
The Zacks Consensus Estimate for ESCO Technologies' 2023 earnings has been revised upward by 13.7% in the past 60 days. Shares of the Zacks Rank #1 company have rallied 32.3% in a year.
Eaton: Headquartered in Dublin, Ireland, this is a diversified power management company, and a global technology leader in electrical components and systems. ETN is likely to benefit from the improving end market conditions, and contribution from organic assets and product development initiatives through extensive investments in research and development.
The Zacks Consensus Estimate for Eaton's 2023 earnings has been revised upward by 2.4% in the past 60 days. The Zacks Rank #2 (Buy) company reported better-than-expected results in each of the last four quarters, the average being 4.23%. Shares of the company have jumped 51.7% in a year.
A. O. Smith: Headquartered in Milwaukee, WI, the company is one of the leading manufacturers of commercial and residential water heating equipment, and water treatment products in the world. With improving supply chains, higher shipments are expected to drive AOS' growth. Robust demand for residential water heaters and commercial water treatment products is a key catalyst behind this company's growth.
The Zacks Consensus Estimate for A. O. Smith's 2023 earnings has been revised upward by 4.7% in the past 60 days. The Zacks Rank #2 company reported better-than-expected results in each of the last four quarters, the average being 13.96%. Shares of the company have rallied 41.7% in a year.
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Emerson Electric Co. (EMR) : Free Stock Analysis Report
Eaton Corporation, PLC (ETN) : Free Stock Analysis Report
A. O. Smith Corporation (AOS) : Free Stock Analysis Report
ESCO Technologies Inc. (ESE) : Free Stock Analysis Report
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