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Electronics-Measuring Instruments Industry Outlook Looks Dim

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The Zacks Electronics – Measuring Instruments industry comprises companies offering wearables, electronic design, test solutions and equipment, metrology solutions plus thermo management products.

The industry players cater to growing demand for electronic devices across major sectors like consumer, automobile, industrial, aerospace & defense and communications.

In keeping with this, the companies are increasing their spend on research and development as well as sales & marketing in order to stay afloat in an era of technological advancements and changing industry standards. Rising expenditures are in turn, marring operational efficiency.

Here are the industry’s three major themes:

  • Higher demand in the consumer sector for connected appliances is acting as a key catalyst. Rapid proliferation of consumer-focused IoT devices like smart speakers and home security solutions are fueling demand for the products offered by industry participants. Further, ongoing technical advancement in the telecommunication sector, backed by the emergence of 5G technology and strong efforts toward modification in Internet infrastructure, seems a tailwind. Moreover, the surging need for security and surveillance system, and satellites in the aerospace and defense industry is driving demand for testing solutions.
     
  • The fitness and wellness trackers as well as smart watches are entering the mainstream of the industry and have accelerated the adoption of the flat-panel display (FPD) technology. However, a speedy change in consumer preferences is a headwind as it limits the companies’ ability to cater to shifting consumer demand in a timely manner. Further, the wearable makers in this industry are investing more resources in R&D in order to align their products with the fast-altering technologies. These are likely to hurt profitability for the industry participants. Moreover, intensifying competitive pressure on these companies from non-traditional wearable makers remains a major concern.
     
  • Most industry players serve the semiconductor industry primarily. However, the ongoing trade tensions between the United States and China have created an uncertain environment that is not conducive to investments, particularly by the semiconductor manufacturers. Further, the trade war is becoming deterrent to growth in the industrial automation area. These factors do not bode well for the industry participants as these have a significant exposure to China. For instance, KeySight Technologies (KEYS - Free Report) , one of the notable stocks in the industry under review, is bearing the brunt of this trade war.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Electronics – Measuring Instruments industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #168, which places it at the bottom 34% of more than 256 Zacks industries.

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

We will present a few stocks that are well poised to outperform the market despite this weak backdrop. However, it’s worth taking a look at the industry’s shareholder returns and current valuation at first.

Industry Outperforms S&P 500 & Sector

The Zacks Electronics – Measuring Instruments Industry has outperformed the Zacks S&P 500 composite as well as the broader Zacks Computer and Technology sector in the past year.

The industry has gained 16.5% compared with the S&P 500’s rise of 0.2% and the same has also come against the broader sector’s decline of 1.5%.

One Year Price Performance



Industry’s Current Valuation

On the basis of price-to-sales ratio (P/S), which is a commonly used multiple for valuing Electronics – Measuring Instruments stocks, the industry is currently trading at 2.93X, lower than the S&P 500’s 3.15X and the sector’s 3.68X.

Over the past five years, the industry has traded as high as 5.65X and as low as 1.35X with the median being at 2.24X as the charts below show.

Price-to-Sales Ratio (TTM)



Bottom Line

We believe, the near-term growth prospects of this industry are bright, given the increasing spending by the manufacturers of semiconductors, automobiles, machineries, mobile phones due to the growing proliferation of IoT techniques. Further, the emergence of 5G technology holds a long-term promise. However, a negative impact of the trade war between the United States and China is expected to persistently hurt the industry.

None of the stocks in the industry sports a Zacks Rank #1 (Strong Buy). However, we are presenting four stocks with a Zacks Rank #3 (Hold) that investors can retain. You can see the complete list of today’s Zacks #1 Rank stocks here.

KeySight Technologies Inc., based in Santa Rosa, CA, is a provider of electronic design and test instrumentation systems. The company serves the communication and electronic industries. It delivered average four-quarter positive earnings surprise of 16.11%.

Price and Consensus: KEYS



San Francisco, CA-based Fitbit, Inc. specializes in wearable activity tracking devices that record personal data including the number of steps taken, distance traveled, calories burned besides other wellness related metrics. It delivered average positive surprise of 163.51% in the trailing four quarters.

Price and Consensus: FIT



Camtek Ltd. (CAMT - Free Report) is a manufacturer of metrology and inspection equipment. The company offers software solutions to the semiconductor industry that are utilized in advanced packaging, memory, CMOS Image Sensors, MEMS, RF and other segments. It has pulled off average beat of 5.14% in the trailing four quarters.

Price and Consensus: CAMT



Nova Measuring Instruments Ltd. (NVMI - Free Report) , based in Rehovot, Israel, offers advanced metrology solutions like monitoring and measurement systems for the semiconductor manufacturing industry. The company delivered average positive surprise of 28.88% in the last four quarters.

Price and Consensus: NVMI


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Camtek Ltd. (CAMT) - free report >>

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