The Zacks Electronics - Testing Equipment Industry comprises of companies offering advanced instruments, electronic testing equipment solutions, thermal management systems, electrical connectors, motors and various test solutions.
The industry is currently benefiting from growing proliferation of electronic devices in every major sector, namely consumer, automobile, industrial, aerospace & defense, healthcare, semiconductors and communications.
Increasing usage of precision motion control solutions in motion control devices required in the aerospace, automation, medical and military equipments is a major positive. Further, automatic test systems are in high demand for testing products that are being manufactured in the above mentioned sectors.
The commercial motor vehicles such as cars, vans, trucks, aircrafts, and helicopters will continue to aid growth in this industry by bolstering demand for vehicle tracking systems, fleet management solutions and other private fleet applications.
Further, wireless tests are becoming mainstream due to their enhanced capabilities of verifying the wireless performance of products like smartphone, tablet, laptop and Internet of Things (IoT) devices.
Additionally, electrical instruments and software that assist in the interrogation of biological properties of molecules and cells in clinical and medical science research work remains the key catalyst for the industry. Further, growing demand for RF test equipments in the medical devices market is a tailwind.
Industry Lags Shareholder Returns
Electronics, which helps in the efficiency and automation of any work, is ubiquitous. However, it appears that the ongoing trade tension between the United States and China, and growing U.S. protectionism has been dampening sentiment on the Electronics - Testing Equipment industry.
The Zacks Electronics - Testing Equipment Industry , within the broader Zacks Computer And Technology Sector , has underperformed both the S&P 500 and its own sector in the past year.
While the stocks in this industry have collectively gained 12.5% over the past year, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 15.9% and 16.8%, respectively.
One-Year Price Performance
Stretched Valuation a Concern
Moreover, the Zacks Electronics - Testing Equipment industry's valuation looks stretched at the moment. One might get a good sense of the industry's relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings.
Notably, a lower P/E ratio is always better.
The industry currently has a forward 12-month P/E ratio of 27.43, which is near its highest level over the past year.
The space also looks expensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 19.96 and the median level is 20.09.
Price-to-Earnings Ratio (TTM)
Moreover, a comparison of the group's P/E ratio with that of its border sector ensures that the group is trading at a huge premium. The Zacks Computer And Technology Sector's forward 12-month P/E ratio of 21.22 and the median level of 21.72 for the same period are way below the Zacks Electronics - Testing Equipment industry's respective ratios.
Price-to-Earnings Ratio (TTM)
Improving Earnings Outlook to Drive Outperformance
Nevertheless, strong industry fundamentals and expectations of solid top-line growth are likely to continue generating positive shareholder returns in the near future. We believe the near-term growth prospects are bright given increased spending by manufacturers of semiconductors, automobiles, machineries, smartphones and medical devices.
However, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.
One reliable measure that can help investors understand the industry's prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance.
Price and Consensus: Zacks Electronics - Testing Equipment Industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $2.59 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Electronics - Testing Equipment industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the EPS of the industry for 2018, but how this projection has evolved recently.
As you can see here, the $2.59 EPS estimate for 2018 has improved from the end of May. In other words, the buy-side analysts covering the companies in this particular industry have been optimistic about raising their estimates.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Solid Prospects
The group's Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.
The Zacks Electronics - Testing Equipment industry currently carries a Zacks Industry Rank #31, which places it at the top 12% of 256 Zacks industries. 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.
Our proprietary Heat Map shows that the industry's rank has continuously improved over the past five weeks.
Long-Term Growth Prospects Strong
The rapid adoption of IoT services, wireless devices, data centers and 5G technologies holds long-term potential for the industry as electronic devices form the very fulcrum of their existence.
Further, ongoing technical advancement in mobile communications, semiconductors and automotive markets are likely to continue driving growth in this industry. Moreover, rising demand for power management applications is a key catalyst.
The industry is expected to remain on a positive track on the back of strong efforts made toward the ongoing modification of the Internet infrastructure, evolution of smart cars & autonomous-driving vehicles. Further, robust demand for collaborative robots which add efficiency to the production process by working with the production workers will aid growth of the industry.
Additionally, medical devices and pharmaceutical markets hold immense growth opportunities, thanks to the growing usage of electronics based testing equipments in these markets.
The long-term (3-5 years) EPS growth estimate for the Zacks Electronics - Testing Equipment industry appears promising. The group's mean estimate of long-term EPS growth rate is currently 11.65%. This compares with 9.83% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
Additionally, revenues have shown a marked improvement since December 2015. Growth can be attributed to the emergence of the software-defined instruments and digital transition, which has accelerated the use of electronics in every sector.
The near-term growth prospect for the Zacks Electronics - Testing Equipment is encouraging for investors. Robust demand in the consumer sector for connected appliances, storage devices and laboratory equipments are key catalysts.
Here, we list three stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).
North Reading, MA-based Teradyne, Inc. (TER) offers automated test equipment and specialized system testing equipment for specific end markets. The company is primarily focused on the semiconductor test market, which generates the bulk of its revenues. It has a Zacks Rank #2 (Buy) and an average four-quarter positive earnings surprise of 22.11%.
Price and Consensus: TER
Agilent Technologies, Inc. (A) based in Palo Alto, CA is an original equipment manufacturer of a broad-based portfolio of test and measurement products, especially catering to the life sicence research space as well as medical devices & equipment market. The company has a Zacks Rank #2 and an average four-quarter positive earnings surprise of 6.62%.
Price and Consensus: A
AMETEK, Inc. (AME) based in Berwyn, PA, is a leading manufacturer of electronic appliances and electromechanical devices catering to numerous end markets like aerospace & defense, medical, automation, petrochemical and many more. The company carries a Zacks Ranks #2. It has delivered an average positive surprise of 6.42% in the trailing four quarters. You can see the complete list of today's Zacks #1 Rank stocks here.
Price and Consensus: AME
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