4 electronics manufacturing stocks to watch amid supply chain issues – July 21, 2022
Strength in end markets bodes well for the Zacks Manufacturing – Electronics industry. However, we note a certain sluggishness in demand for electronic products, weighed down by the recent slowdown in manufacturing activities. This can be linked to supply chain disruptions and labor shortages. Challenges associated with raw material cost inflation are additional concerns.
In this scenario, pricing actions aimed at countering cost escalation should contribute to the performance of ABB AG. (ABB – free report), Emerson Electric Co.. (EMR – free report), Regal Rexnord Corporation (RRX – free report) and The LGL group (LGL – free report).
About the industry
The Zacks Manufacturing-Electronics industry includes companies that manufacture electronic products such as battery chargers, battery accessories, outdoor cabinets, power transmission products, electric motion controls, and motive power devices. Some industry players also provide water treatment products, engineered flow components, treatment equipment and turnkey systems. These companies also offer industry-leading customer support and after-sales services to end users. These companies are increasing their investments to develop innovative technologies, improve the customer and employee experience as well as supply chain modernization programs. Electronics manufacturing companies sell products and services to a variety of end markets, including robotics, semiconductors, defense, aerospace, medical equipment, and satellite communications.
3 trends shaping the future of the electronics manufacturing industry
Supply chain constraints: Supply chain constraints, primarily those related to component shortages and labor scarcity, are weighing on the operations of industry players. Longer delivery times due to supply chain constraints lead to delays in deliveries to customers, which in turn could hurt business profitability. Commodity cost inflation is an additional concern for industry players, which is likely to hamper earnings performance. In order to offset rising costs and protect margins, companies are resorting to pricing actions.
Sweetness in demand: Although manufacturing activity continues to grow, it is growing at a slower pace, with a decline in new domestic and export orders. This indicates a weaker demand for electronic products. According to the latest report from the Institute for Supply Management (ISM), the manufacturing PMI (Purchasing Managers’ Index) was 53% in June, down 3.1 percentage points from May. The new orders index fell 5.9 percentage points to 49.2% last month and the new export orders index fell 2.2 percentage points to 50.7%.
Strength in end markets: Although there is some weakness in demand due to supply chain constraints, the strength of several end markets in the electronics manufacturing industry, such as oil and gas, l automotive, life sciences, electronics and semiconductors, transportation, defense, commercial, industrial and residential should help the industry stay afloat. Well-diversified end markets help industry players offset the weak demand associated with a single market. Moreover, digitization of business operations helps industry players to enhance their competitiveness through increased operational productivity, product quality and better cost management.
Zacks’ industry rankings point to bleak outlook
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks industrial products sector, currently carries the Zacks Industry #188 ranking. This ranking places it in the bottom 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a bleak short-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of industries ranked by Zacks is the result of a negative earnings outlook for the constituent companies overall. The Zacks consensus estimate for the group’s earnings per share in 2022 has fallen 1.6% since the end of December 2021.
Despite the gloomy short-term outlook for the industry, we will feature some noteworthy actions. But before that, it’s worth taking a look at the market performance of the industry and its current valuation.
Industrials outperforms sector, lags S&P 500
The Zacks Manufacturing – Electronics industry has outperformed its sector but underperformed the Zacks S&P 500 Composite Index over the past year.
During this period, the industry fell 19.2% against the sector and the S&P 500 index declines of 21.6% and 17.3%.
Year-over-year price performance
Current industry assessment
Based on the 12-month price-to-earnings (P/E) ratio, which is a multiple commonly used to value manufacturing stocks, the sector is currently trading at 17.67X compared to 16.77X for the S&P 500. It is also above the sector P/E ratio of 14.24X.
Over the past five years, the industry has traded as low as 26.61X, as low as 13.65X and at the median of 18.92X, as seen in the chart below.
4 Manufacturing – Electronics Stocks to keep a tab on
LGL Group: The recovery of the avionics market and the strong deliveries of defense products stimulate the turnover of the company. The increase in business volumes supported the performance of its margin. Buoyed by these tailwinds, the company’s shares have gained 29% over the past year.
Based in Orlando, Florida, the LGL Group designs, manufactures and markets frequency and spectrum monitoring products worldwide. Zacks’ consensus estimate for the company’s earnings in 2022 has been revised up 27.8% in the past 90 days. LGL wears a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Pricing and Consensus: LGL
ABB: The strength of the company’s end markets such as oil and gas, buildings, mining and metals, automotive, marine and ports, renewable energy and food and beverages is likely to boost its performance. Growth in short-cycle business and improvement in service and process-related businesses should also help the business. The title fell by 22% in one year.
Based in Zurich, Switzerland, ABB is a leading technology company. Its products and services can be used in automated manufacturing, the provision of digital solutions and the electrification of industry. Zacks’ consensus estimate for the company’s earnings in 2022 has been revised up 3.6% over the past 90 days. ABB wears a Zacks rank #3 (Hold).
Pricing and Consensus: ABB
Emerson: The company benefits from the strength of the life sciences, chemicals and energy end markets. The recovery of the energy end market and the solid level of the order book are other favorable winds for EMR. The company’s focus on operational efficiency and cost control measures should support its margins. The stock has lost 15.2% of its value over the past year.
Headquartered in St. Louis, MO, Emerson is a diversified global engineering and technology company, providing a wide range of products and services to customers in consumer, commercial and industrial markets. The Zacks consensus estimate for the company’s earnings in 2022 has been revised up 1.4% over the past 90 days. EMR wears a Zacks rank #3.
Pricing and Consensus: EMR
Rexnord Treat: Strength in the general industrial, forestry and agriculture end markets is driving the performance of the Motion Control Solutions segment. The acquisition of Arrowhead Systems in November 2021 is also driving segment growth. Strong residential HVAC business growth in North America and pricing actions are helping the Climate Solutions division. Shares of RRX are down 7.2% over the past year.
Based in Beloit, WI, Regal Rexnord is a manufacturer of electric motors and electronic controls, power transmission components, air handling products, and specialty electrical components and systems. The Zacks consensus estimate for the company’s earnings in 2022 has been revised up 1.5% over the past 90 days. Regal Rexnord wears a No. 3 Zacks rank.