The Zacks Manufacturing-Electronics industry comprises companies that manufacture various types of electronic products like battery charges, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls, water management products and motive power devices. Also, these companies deliver state-of-the-art customer-support and after-market services to end users.

The manufacturing electronic companies sell products and services in various types of end-markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.  Some notable firms in the industry are ABB Ltd , Eaton Corporation plc (ETN Quick QuoteETN - Free Report) and Energous Corporation (WATT Quick QuoteWATT - Free Report) .

Here are the three major themes in the industry:

• Of late, the U.S. manufacturing companies have been benefiting from recovery in manufacturing activity, technological advancement in manufacturing processes and the government's emphasis on infrastructure development. Per the latest report by the Federal Reserve on Sep 17, industrial production increased 0.6% at a seasonally adjusted rate in August from the previous month. Importantly, manufacturing production in August recorded growth of 0.5% against a 0.4% drop in July. Notably, the increase was backed by strength across durable manufacturing industry. Adding to the positives was the latest IHS Markit report published on Sep 23, wherein the initial reading of the U.S. manufacturing purchasing managers’ index was 51 in September, up from 50.3 in August, and the highest since April. Notably, any reading above 50 means rise in U.S. manufacturing activities. Against this backdrop, we believe stimulus provided by President Trump’s business-friendly policies including corporate tax overhaul, impetus to streamline business regulations and higher government spending will continue aiding the electronic product manufacturing companies.
   
• Inflationary pressure on account of tariffs on import of various categories of goods is a major concern for the U.S. manufacturing companies. We notice that tariffs worth billions of dollars imposed by Washington and Beijing on each other’s products are resulting in material cost inflation and pulling down margins of many manufacturing companies. It’s worth noting here that although some electronic product manufacturers are defying inflation with selling price adjustments, these amendments are making exports expensive and hurting their overseas revenues. As a matter of fact, the uncertain demand environment for products created by the trade tariffs is likely to continue hurting profits of electronic product manufacturing companies in the near term. In addition, a stronger U.S. dollar is weighing on the overseas trading arms of these companies.
   
• The U.S. manufacturing companies are also experiencing skilled labor shortage and higher wage costs. Several electronic manufacturing companies are currently looking for innovative technologies to boost operational efficiency. Amid this, the businesses are facing severe scarcity of skilled workforce. In addition, acute shortage of truck drivers is affecting U.S. manufacturers. On account of this, the firms are now experiencing supply-side challenges related to elevated freight charges. These setbacks are likely to continue elevating costs and hurt profits of electronic product manufacturing companies in the near term.

Although the industry has inherent growth potential, the ongoing trade war between the United States and China has rendered a relatively grim outlook for the near future.

Zacks Industry Rank Indicates Dull Prospects

The Manufacturing – Electronics industry is a 17-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #221, which places it in the bottom 13% 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 discouraging 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 bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. It’s worth noting here that the industry’s earnings estimates for the current year have decreased 20.9% over the past year.

Despite the grim outlook, we present a few stocks that have strong earnings growth prospects. Before we discuss the stocks, it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms Sector & S&P 500

The Zacks Manufacturing – Electronics industry has underperformed both the S&P 500 and its sector in the past year. While stocks in this industry have collectively declined 15.2%, the S&P 500 has rallied 0.7%, whereas the Zacks Industrial Products sector has declined 11.1%.

One-Year Price Performance

Manufacturing – Electronics Industry’s Valuation

Price/Earnings (P/E) ratio is commonly used for valuing manufacturing stocks.

The industry’s forward 12-month P/E ratio is 16.42. This clearly shows that the industry is trading above the sector’s forward 12-month P/E ratio of 14.18 but below the S&P 500’s 16.91.

Over the past five years, the industry has traded at the highest level of 20.04x forward 12-month earnings and lowest level of 13.18x. The median level, over the same period, was 16.71X.

Manufacturing – Electronics Industry’s Valuation Versus Sector

Manufacturing – Electronics Industry’s Valuation Versus S&P 500

Bottom Line

On account of the prevalent headwinds, we believe that investment in the industry may not be prudent at the moment.

Despite the industry’s poor rank, we present four promising electronic product manufacturing stocks, which possess the potential to sail through the tough market conditions and are likely to outshine many industry peers going forward.

Here we discuss in brief four stocks:

Plug Power Inc. (PLUG Quick QuotePLUG - Free Report) : The stock of this Latham, NY-based company currently carries a Zacks Rank #2 (Buy). The stock has rallied 117.8% so far in 2019. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, the Zacks Consensus Estimate for the company’s bottom line has improved 5.3% for 2019.

Price and Consensus: PLUG

ESCO Technologies Inc. (ESE Quick QuoteESE - Free Report) : The stock of this St. Louis, MO-based company currently carries a Zacks Rank #3 (Hold). Year to date, the stock has returned 19.8%.

The Zacks Consensus Estimate for fiscal 2019 (ending Sep 30, 2019) earnings has risen 0.6% in the past 30 days.

Price and Consensus: ESE

Rexnord Corporation : The stock of this Milwaukee, WI-based company currently carries a Zacks Rank #3. The stock has gained 20.5% so far this year.

In the past 60 days, the Zacks Consensus Estimate for fiscal 2020 (ending Mar 31, 2020) earnings has increased 1%.

Price and Consensus: RXN

Schneider Electric S.E. (SBGSY Quick QuoteSBGSY - Free Report) : The France-based company carries a Zacks Rank #3. Year to date, the company’s stock has risen 25.7%.

In the past 60 days, the Zacks Consensus Estimate for 2019 earnings has remained stable at $1.18.

Price: SBGSY

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