The Zacks Instruments – Control industry is likely to benefit from the diligent focus on energy-efficient production processes and integrated software systems. Rising demand for state-of-the-art technology to replace legacy industrial control systems with automated products is expected to aid growth.

However, elevated customer inventory levels amid a challenging geopolitical environment might hurt the process automation and instrumentation market. Nevertheless, Woodward, Inc. (WWD Quick QuoteWWD - Free Report) , Watts Water Technologies, Inc. (WTS Quick QuoteWTS - Free Report) and Thermon Group Holdings, Inc. (THR Quick QuoteTHR - Free Report) are likely to gain from high digitized technology demand, greater emphasis on energy efficiency, focus on cost-reduction initiatives and broad-based endorsement of industrial automation and optimum resource utilization.

Industry Description

The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion-control components and systems used in a wide range of industries. These companies deliver sophisticated flow measurement, control and communication solutions for air, water and other forms of gas and liquid used for commercial and residential purposes. The companies offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry. Some industry players 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. Few firms provide water reuse products, including drainage and rainwater harvesting solutions.

What's Shaping the Future of Instruments - Control Industry

Depleting Margins: Material cost inflation, resulting from constant inflationary pressures, has been affecting industry players’ margins. Transportation costs are also on the rise. Moreover, high raw material prices due to inflation, escalating Middle East tensions, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the production schedules of various firms. While the companies are focused on improving their operating performances, the inability to obtain adequate supplies of raw materials and product parts at favorable prices is likely to hurt their businesses. With firms being unable to pass on the entire increase in raw material prices to customers due to stiff competition, profitability is mostly on the wane. High customer inventory levels and a conservative approach toward placing orders for high-value items remain headwinds.

Focus on Optimum Productivity: The industry’s growth is driven mainly by the emphasis on digitized technologies in manufacturing activities, such as the Industrial Internet of Things. The demand for process automation, instrumentation products, safety automation systems and multivariable pressure transmitters for the fast-track manufacturing process is likely to fuel long-term growth opportunities. The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. Therefore, the rapid adoption of technology across various industries and growing regulation and compliance requirements will continue to be major growth drivers. In addition, field instruments play a significant role in process control by measuring the key elements, such as temperature, pressure, flow and level, in process industries such as chemicals, mining and pharmaceuticals. These include transmitters that measure the pressure, flow, temperature, level and humidity of liquids and gases, which are essential for achieving optimum productivity. A differentiated product offering gives greater opportunities for companies to strengthen their market positions.

Price-Sensitive Competition: The companies operate in markets that are susceptible to high competitive pressures and are under constant threat from low-cost suppliers, primarily based in China. Price-sensitive competition for customer retention in the core business is expected to intensify in the coming days. Aggressive competition is likely to limit the ability to attract and retain customers and affect operating and financial results. Due to an international footprint, these firms are further exposed to foreign exchange fluctuations that affect their cash flows. Changes in competitive conditions, including the availability of the latest products and services, the introduction of distribution channels and changes in OEM and aftermarket pricing, are likely to hamper operations and affect sales for industry participants.

Industrial Automation Thrust: Greater focus on increased adoption of automation across all industry verticals and higher investments in new technologies are expected to drive growth over the next few years. North America is expected to continue dominating the market in terms of adopting automation. Rising infrastructural investments in the energy and power sector, increasing demand for organic food and nutritional beverages, and favorable government policies are aiding growth. The pharmaceutical industry's process automation and instrumentation market is also growing due to low-cost factors and an evolving regulatory environment. Focus on high-quality equipment indicates progressive buyer maturity and willingness to partner with process control industry players.

Zacks Industry Rank Indicates Bearish Trends

The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #168, which places it in the bottom 33% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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.

Before we present a few Instruments Control stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500, Sector

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

The industry has jumped 24.9% compared with the S&P 500 and the sector’s growth of 39.8% and 48.5%, respectively. 

One-Year Price Performance

Industry's Current Valuation

The 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 12.2X compared with the S&P 500’s 19.44X. It is also below the sector’s trailing 12-month EV/EBITDA of 19.09X.

Over the past five years, the industry has traded as high as 17.78X and as low as 6.83X, with a median of 12.47X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

3 Instruments Control Stocks to Keep an Eye on

Woodward: Headquartered in Fort Collins, CO, the company is an independent designer, manufacturer and service provider of energy control and optimization solutions. It provides a wide array of products for fuel, combustion, fluid, actuation and electronic applications, which serve the commercial aerospace, business jet, military and energy markets. Woodward plans to shift some of the machine components to its factories/capable third-party suppliers to reduce costs and lead time. The stock has gained 31.4% in the past year and has a VGM Score of B. It has a long-term earnings growth expectation of 15.8% and delivered an earnings surprise of 18.5%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current and next-year earnings has been revised 29% and 20.7% upward, respectively, over the past year. Woodward carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: WWD

Watts Water: Headquartered in North Andover, MA, the company designs, manufactures and sells various water safety and flow control products to promote safety, energy efficiency and water conservation for commercial and residential buildings. It is benefiting from aggressive cost-reduction actions, along with a strong balance sheet. It is focused on enhancing organic growth, driving margin expansion and reinvesting in productivity initiatives. Watts Water aims to launch smart and connected products, which are likely to provide it with further differentiation in the marketplace. This Zacks Rank #3 stock has a VGM Score of B. It has a long-term earnings growth expectation of 8% and delivered an earnings surprise of 9.4%, on average, in the trailing four quarters. The stock has gained 15.1% in the past year. The Zacks Consensus Estimate for current and next-year earnings has been revised 9.2% and 6.3% upward, respectively, over the past year.

Price and Consensus: WTS

Thermon: Headquartered in Austin, TX, Thermon provides engineered industrial process heating solutions for process industries worldwide. Its products include air heaters, boilers, controlling and monitoring solutions, heat tracing systems, tank heating systems, thermostats, tubing bundles, enclosure and explosion-proof gas catalytic heaters, gas-fired blowers and gas heating accessories that comprise regulators, valves, mounting brackets and battery cables. The buyout of Powerblanket has augmented Thermon's exposure to growing industrial and commercial end markets through its freeze protection, temperature control and flow assurance solutions. It has also enabled the company to expand into adjacent product lines and increase access to diversified end markets. The stock has a VGM Score of A. This Zacks Rank #3 stock has delivered an earnings surprise of 24.9%, on average, in the trailing four quarters.

Price and Consensus: THR