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Instruments Control Industry Outlook: Prospects Look Bleak
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The Zacks Instruments – Control industry comprises providers of precision and specialty motion control components and systems that are used in a wide range of industries around the world. These companies deliver sophisticated flow measurement, control and communication solutions, which include air and water as well as other forms of gas and liquid for commercial and residential applications. They 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 also provide heating, ventilation, and air conditioning and gas products. These comprise boilers, water heaters, heating solutions and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. In addition, few firms within the industry offer drainage and 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 three major themes in the industry —
• As analytical instruments have little scope for differentiation, major analytical equipment manufacturers are following conventional strategies such as forming alliances with other vendors or acquiring rivals to stay ahead of competition. The industry is primarily dependent on R&D investments, and as the local players lack the huge capital to spend on R&D, they either exit the market or get acquired by well-established suppliers. Most firms have to differentiate their products in order to sustain themselves in a highly competitive environment.
• Intensifying competitive pressure in the marketplace has led to loss of market share for industry players and hurt prices. The environment is also affected by the movement toward radio technologies, and the demand for replacement units. The increased competitiveness among vendors and manufacturers is however expected to improve growth prospects of industrial automation in the long run.
• Inability to obtain adequate supplies of raw materials and component parts for products at favorable prices has a material adverse effect on business and financial condition as this negatively impacts timely deliveries to customers. The United States is a major market for factory automation and industrial control. The demand for advanced manufacturing robotic technologies will, to some extent, boost growth of the market in the region. The focus on building a high-end cyber-physical system to improve productivity by delivering connected, intelligent manufacturing systems capable of supporting high-levels of customization, flexibility and end-to-end manufacturing process automation will likely help the market grow.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #206, which places it at the bottom 20% 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 a result 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 fiscal year have decreased 0.6% over the past year, while the same for the next fiscal year has declined 9.5%.
Before we present a few instruments control stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outpaces Sector, S&P 500
The Zacks Instruments – Control industry has outperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry has returned 14.5% over this period compared with the S&P 500’s rise of 9.7%. Meanwhile, the broader sector has gained 12.4%.
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 12.19X compared with the S&P 500’s 11.13X. It is trading above the sector’s trailing 12-month EV/EBITDA of 10.88X.
Over the past five years, the industry has traded as high as 13.79X, as low as 9.57X with the median of 11.34X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Gradual shift in production approach from conventional to digitized methods, largely driven by the growing adoption of IoT across industries and rising labor wages in major manufacturing hubs, is expected to boost the process automation and instrumentation control market globally. However, the companies operating in this space remain susceptible to near-term headwinds, including pricing pressures, high R&D costs and supply chain inadequacies.
None of the stocks in the space currently carries a Zacks Rank #1 (Strong Buy) or #2 (Buy). So, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
Badger Meter, Inc. (BMI - Free Report) : Shares of this Milwaukee, WI-based instruments control firm have rallied 31.7% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings has moved up 5.6% in the past year. The company delivered average positive earnings surprise of 6.3% in the trailing four quarters.
Price and Consensus: BMI
Woodward, Inc. (WWD - Free Report) : This Fort Collins, CO-based instruments control firm has gained 42.1% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised 9.4% upward in the past year. The company delivered average positive earnings surprise of 12.1% in the trailing four quarters.
Price and Consensus: WWD
Transcat, Inc. (TRNS - Free Report) : Shares of this Rochester, NY-based instruments control firm have rallied 47.5% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings has remained flat in the past 60 days. The company delivered average positive earnings surprise of 6.9% in the trailing four quarters.
Price and Consensus: TRNS
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Instruments Control Industry Outlook: Prospects Look Bleak
The Zacks Instruments – Control industry comprises providers of precision and specialty motion control components and systems that are used in a wide range of industries around the world. These companies deliver sophisticated flow measurement, control and communication solutions, which include air and water as well as other forms of gas and liquid for commercial and residential applications. They offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry.
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Some of the industry participants also provide heating, ventilation, and air conditioning and gas products. These comprise boilers, water heaters, heating solutions and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. In addition, few firms within the industry offer drainage and 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 three major themes in the industry —
• As analytical instruments have little scope for differentiation, major analytical equipment manufacturers are following conventional strategies such as forming alliances with other vendors or acquiring rivals to stay ahead of competition. The industry is primarily dependent on R&D investments, and as the local players lack the huge capital to spend on R&D, they either exit the market or get acquired by well-established suppliers. Most firms have to differentiate their products in order to sustain themselves in a highly competitive environment.
• Intensifying competitive pressure in the marketplace has led to loss of market share for industry players and hurt prices. The environment is also affected by the movement toward radio technologies, and the demand for replacement units. The increased competitiveness among vendors and manufacturers is however expected to improve growth prospects of industrial automation in the long run.
• Inability to obtain adequate supplies of raw materials and component parts for products at favorable prices has a material adverse effect on business and financial condition as this negatively impacts timely deliveries to customers. The United States is a major market for factory automation and industrial control. The demand for advanced manufacturing robotic technologies will, to some extent, boost growth of the market in the region. The focus on building a high-end cyber-physical system to improve productivity by delivering connected, intelligent manufacturing systems capable of supporting high-levels of customization, flexibility and end-to-end manufacturing process automation will likely help the market grow.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #206, which places it at the bottom 20% 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 a result 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 fiscal year have decreased 0.6% over the past year, while the same for the next fiscal year has declined 9.5%.
Before we present a few instruments control stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outpaces Sector, S&P 500
The Zacks Instruments – Control industry has outperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry has returned 14.5% over this period compared with the S&P 500’s rise of 9.7%. Meanwhile, the broader sector has gained 12.4%.
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 12.19X compared with the S&P 500’s 11.13X. It is trading above the sector’s trailing 12-month EV/EBITDA of 10.88X.
Over the past five years, the industry has traded as high as 13.79X, as low as 9.57X with the median of 11.34X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Gradual shift in production approach from conventional to digitized methods, largely driven by the growing adoption of IoT across industries and rising labor wages in major manufacturing hubs, is expected to boost the process automation and instrumentation control market globally. However, the companies operating in this space remain susceptible to near-term headwinds, including pricing pressures, high R&D costs and supply chain inadequacies.
None of the stocks in the space currently carries a Zacks Rank #1 (Strong Buy) or #2 (Buy). So, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
Badger Meter, Inc. (BMI - Free Report) : Shares of this Milwaukee, WI-based instruments control firm have rallied 31.7% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings has moved up 5.6% in the past year. The company delivered average positive earnings surprise of 6.3% in the trailing four quarters.
Price and Consensus: BMI
Woodward, Inc. (WWD - Free Report) : This Fort Collins, CO-based instruments control firm has gained 42.1% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised 9.4% upward in the past year. The company delivered average positive earnings surprise of 12.1% in the trailing four quarters.
Price and Consensus: WWD
Transcat, Inc. (TRNS - Free Report) : Shares of this Rochester, NY-based instruments control firm have rallied 47.5% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings has remained flat in the past 60 days. The company delivered average positive earnings surprise of 6.9% in the trailing four quarters.
Price and Consensus: TRNS
Radical New Technology Creates $12.3 Trillion Opportunity
Imagine buying Microsoft stock in the early days of personal computers… or Motorola after it released the world’s first cell phone. These technologies changed our lives and created massive profits for investors.
Today, we’re on the brink of the next quantum leap in technology. 7 innovative companies are leading this “4th Industrial Revolution” - and early investors stand to earn the biggest profits.
See the 7 breakthrough stocks now>>