The Zacks Manufacturing - Electronics industry is poised to benefit from steady demand across the electronic services end market, growing adoption of advanced manufacturing technologies and processes and product innovation efforts. A surge in e-commerce activities is also likely to foster the industry’s growth.
However, challenges in the manufacturing sector amid persistent supply-chain issues have been denting the performance of some industry players. Eaton Corporation plc ETN, Emerson Electric Co. EMR, Zurn Elkay Water Solutions Corporation ZWS and Powell Industries, Inc. POWL are a few industry participants that might capitalize on 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.
Trends Shaping the Manufacturing Electronics Industry's Future
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 report, in February 2024, the Manufacturing PMI (Purchasing Manager’s Index) touched 47.8%, contracting for the 16th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. Also, the New Orders Index returned to the contraction territory at 49.2% in February, declining 3.3 percentage points from the figure recorded in January. In addition, supply-chain disruptions, especially related to the availability of electronic components, remain a concern for industry participants of late. This is evident from the latest ISM report’s Supplier Deliveries Index, which reflected slower deliveries in February.
Strength in the Electronics Services Market: Despite a slowdown in manufacturing activities, demand across key end markets remains stable. The electronics manufacturers are steadily benefiting 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 been supporting the electronics manufacturing services market. In addition, industry players like Emerson Electric with wide exposure to the booming medical and life science markets, are witnessing a positive momentum across their businesses owing to sturdy demand for their products and solutions. A surge in the e-commerce business also boosted several industry participants’ prospects.
Technological Advancement Benefits: 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. With digitization, businesses are gaining a detailed insight into their operational performance, demand cycles, delivery status and supply-chain issues. This, in turn, is helping them bolster their competitiveness in the market with enhanced operational productivity, product quality and lower costs.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #27. This rank places it in the top 11% 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 outperform 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 11.9% 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 & the S&P 500
The Zacks Manufacturing – Electronics industry has outperformed the broader sector and the Zacks S&P 500 composite index in the past year.
Over this period, the industry has rallied 41.8% compared with the sector’s and S&P 500 Index’s growth of 21.8% and 30.6%, respectively.
One-Year Price Performance
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 24.23X compared with the S&P 500’s 20.93X. It is also above the sector’s P/E ratio of 18.36X.
Over the past five years, the industry has traded as high as 28.22X, as low as 13.90X and at the median of 21.67X, as the chart below shows.
Price-to-Earnings Ratio vs SP500
Price-to-Earnings Ratio vs Sector
4 Manufacturing - Electronics Stocks to Buy
Powell Industries: Headquartered in Houston, TX, the company is engaged in designing, manufacturing, and distributing custom-engineered equipment and systems. POWL's portfolio includes products like integrated power control room substations, custom-engineered modules, electrical houses and medium-voltage circuit breakers, among others.
Strength across petrochemical, oil and gas, utility, commercial and other industrial end markets, along with a solid backlog, is a key catalyst behind this company’s growth.
Shares of Powell Industries have skyrocketed 266.4% in the past year. The company reported better-than-expected results in each of the last two quarters, the average being 77.6%. The Zacks Consensus Estimate for Zacks Rank #1 (Strong Buy) company’s 2024 earnings has been revised upward by 44.2% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: POWL
Eaton: Headquartered in Dublin, Ireland, this is a diversified power management company and a global technology leader in electrical components and systems. ETN has been benefiting from the improving end market conditions, increasing demand from the new AI data center, solid backlog level and product development initiatives through investments in research and development.
Shares of the Zacks Rank #2 (Buy) company have jumped 73.3% in a year. The company reported better-than-expected results in each of the last four quarters, the average being 4.8%. Also, the Zacks Consensus Estimate for Eaton’s 2024 earnings has been revised upward by 2.3% in the past 60 days.
Price and Consensus: ETN
Emerson Electric: Based 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 process and hybrid end markets in the quarters ahead. Also, its robust backlog level and acquisitions of Afag and Flexim are likely to boost its performance.
Shares of the Zacks Rank #2 company have increased 33.1% in the past year. The company delivered an earnings surprise of 11.8%, on average, beating estimates thrice in the last four quarters. Also, the Zacks Consensus Estimate for the company’s fiscal 2024 (ending September 2024) earnings estimates have improved 2.3% in the past 60 days.
Price and Consensus: EMR
Zurn Elkay Water Solutions: Based in Milwaukee, WI, the company is a designer, manufacturer and marketer of water management solutions primarily in the United States and Canada. ZWS is poised to gain from growing awareness of the need for clean, filtered drinking water, solid demand for its products and solutions, and its focus on operational execution.
Shares of Zurn Elkay Water Solutions have rallied 48.6% in a year. The company delivered an earnings surprise of 12.4%, on average, beating estimates in each of the past trailing four quarters. The Zacks Consensus Estimate for the Zacks Rank #2 company’s 2024 earnings has been revised upward by 3.6% in the past 60 days.
Price and Consensus: ZWS
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
