The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems that are used in a wide range of industries worldwide. These companies deliver sophisticated flow measurement, control and communication solutions for air, water and other forms of gas and liquid used in commercial and residential purposes. The firms 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 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. Also, a few firms within the industry provide water re-use products, consisting of drainage and rainwater harvesting solutions for industrial, marine and residential applications.

Let’s take a look at the four major industry themes.

•    The COVID-19 pandemic has led to a slowdown in economic activities in the United States, the instrument control industry being no exception. The halt in production along with supply and logistics issues is likely to create tremendous backlogs. The crisis is gravely impacting the global economy and has compelled policymakers to look for ways to respond. Meanwhile, the United Nations World Economic Situation and Prospects report forecasts a 15% contraction in world trade in 2020 due to a sharp reduction in demand and disruption in global supply chains. The world economy is likely to shrink 3.2% this year, suggesting the sharpest contraction since the Great Depression in the 1930s.

•    Business processes have broadly evolved in the past decade, with advanced technologies being a major catalyst. As a result, companies are forced to deal with a variety of challenges and success is largely dependent upon being able to adapt and overcome the barriers. As analytical instruments have little scope for differentiation, prominent equipment makers are following conventional strategies like forming alliances with other vendors or acquiring rivals to stay ahead of the competition. The industry is primarily dependent on R&D activities, and as local players lack huge capital, they either exit the market or get acquired by well-established suppliers.

•    U.S.-based manufacturers face severe competition across the world. China, in particular, has been a perennial concern as it offers similar products at a lesser price. Most firms have to differentiate their products in an attempt to strengthen their market share in a price-competitive environment. Intensifying competition has led to loss of business and a decline in the average selling price of products. The industry is also affected by the shift toward radio technology, with volatility in demand for replacement units.

•    Inadequate supply of raw materials and components at favorable prices has had a material negative impact on businesses, affecting timely deliveries to customers. The United States is a major market for factory automation and industrial control. But U.S. manufacturers often fail to compete with their offshore counterparts in terms of price due to labor cost differentials and government regulations. The federal government has introduced new regulations and compliance issues that are compelling suppliers to make adjustments and spend more on monitoring compliance. Keeping abreast of regulations and managing compliance reporting is a major challenge for companies.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Instruments – Control industry, which has seven constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #237, which places it in the bottom 6% 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 dull near-term prospects. Interestingly, 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.

Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of a 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 year and the next have decreased 51.4% and 38.9%, respectively over the past year.

Before we present a few instruments control stocks that are well-positioned to outperform the market (despite broader challenges) based on a healthy earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms Sector, S&P 500

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

The industry has lost 28.7% against the S&P 500’s rise of 0.3%. Meanwhile, the broader sector has risen 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 8.19X compared with the S&P 500’s 10.39X. It is also below the sector’s trailing 12-month EV/EBITDA of 11.19X.

Over the past five years, the industry has traded as high as 13.18X, as low as 6.78X with the median of 11.47X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)





Bottom Line

The companies operating in this industry are susceptible to near-term headwinds like business shutdowns, supply-chain inadequacies and pricing pressure. Despite manufacturing challenges, the industry remains an important contributor to the U.S. economy. So, makers need to utilize the latest technology to stay relevant, innovative and competitive. The industry is expected to benefit from promising long-term growth drivers when the economy reopens owing to improvement in macroeconomic climate accompanied by revival in large-scale demand. 

Firms need to look into systems that can support efficient operations, save costs and increase service levels. The real test is how to best implement IoT to achieve operational goals such as reducing costs, improving efficiency, supporting compliance and pushing product innovation.

None of the stocks in the industry currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). We are presenting three stocks with a Zacks Rank #3 (Hold) that investors may keep on their radar. You can see the complete list of today’s Zacks #1 Rank stocks here.

Badger Meter, Inc. (BMI Quick QuoteBMI - Free Report) : Shares of this Milwaukee, WI-based flow measurement, control and communication solutions supplier have gained 6.3% in the past year. The Zacks Consensus Estimate for its current-year earnings has remained stable in the past seven days.

Price and Consensus: BMI



Thermon Group Holdings, Inc. (THR Quick QuoteTHR - Free Report) : Shares of this Austin, TX-based industrial process heating solutions provider have lost 46.2% in the past year. The consensus estimate for its current-year earnings has remained stable in the past seven days.

Price and Consensus: THR



Transcat, Inc. (TRNS Quick QuoteTRNS - Free Report) : Shares of this Rochester, NY-based calibration and laboratory instrument services provider have rallied 10% in the past year. The consensus estimate for its current-year earnings has been steady in the past 30 days. Transcat has a trailing four-quarter positive earnings surprise of 18%, on average. The company’s earnings beat the Zacks Consensus Estimate in two of the last four quarters. It has a long-term earnings growth expectation of 8% compared with 9.9% of the industry.

Price and Consensus: TRNS



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