Four Testing Tools Inventories to Escape a Difficult Business
Disruptions in the supply chain and the global dynamics of the end market due to the coronavirus pandemic had a negative impact on the Zacks Electronics – Testing Equipment industry. In particular, the weak automotive, industrial and linear markets are putting a considerable strain on the sector’s prospects.
However, companies like it Teradyne (TO HAVE), AMETEK (A ME), Cognex (CGNX) and National Instruments Corporation (NATI) are well positioned to capitalize on 5G-related growth opportunities, fuel the drive to automate, and capitalize on ongoing trends in home and work-from-home learning. In addition, the emergence of software-enabled test instruments and devices remains a silver lining for industry participants.
The Zacks Electronics – Testing Equipment industry includes companies that provide advanced instruments, electronic test equipment solutions, thermal management systems, electrical connectors, motors, and various test solutions.
The major end markets served by this particular industry are consumer, automotive, industrial, aerospace and defense, healthcare, semiconductor and communications to name a few.
3 Trends Shaping the Future of Electronics – Test Equipment Industry
Disruptions in the supply chain are a perennial issue: Industry players have been hit by the impact of the coronavirus-induced macroeconomic headwinds. The problems in the supply chain resulted from restrictions on social distancing and on-site protection due to the current pandemic situation, which in turn had a serious impact on these companies. Although economies are gradually opening up again in several parts of the world, production delays remain a major concern. In addition, the panoptic impact of the COVID-19-triggered crisis compounded concerns about the ongoing economic downturn, which continues to hurt new bookings from industry players including celebrities like Fortive (FTV) and AMETEK. In addition, the recurrence of COVID-19 cases with increasing health risks and the associated surge in the death toll made people more concerned about further disruptions that could disrupt their spending patterns.
Softness in non-COVID-19 test labs is a disadvantage: Although industry participants remain well-positioned to benefit from the increasing use of electronic test equipment and software in interrogating the biological properties of molecules and cells in clinical and medical research, the economic turmoil caused by COVID-19 has taken a toll in this area of the industry. In particular, the weak demand for electronic device parts in several non-COVID-19 diagnostic test laboratories is a major disadvantage. For example, Agilent (A), one of the notable players in the underlined industry, is suffering a setback as customers bought fewer equipment due to this pandemic.
5G perspectives are a key catalyst: The increasing use of 5G is very promising for the industry players in the short term. An increase in the demand for 5G test solutions required for 5G deployment is very positive. Additionally, the current coronavirus-triggered work-from-home and learn-from-home wave around the world that is increasing the demand for high-speed internet services bodes well for electronics companies stepping up their 5G efforts. In addition, the growing number of high-speed data centers around the world is providing a tailwind. Given this bullish scenario, the industry is expected to remain on the growth path, supported by strong efforts to build 5G strength.
The story goes on
Zacks’ industry rank indicates dire prospects
The Zacks Electronics – Testing Equipment industry is part of the broader Zacks Computer and Technology sector. It has a Zacks industry rank of # 217, placing it in the bottom 12% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, suggests bearish near-term prospects. Our research shows that the top 50% of Zacks industries outperform the bottom 50% by a factor of more than 2 to 1.
Despite such a dire industry scenario, some stocks have the potential to outperform the market due to the strong earnings outlook. Before we dive into the top industry picks, though, it’s a good idea to first take a look at the industry’s shareholder returns and current valuation.
Industry beats S&P 500, Lags Sector
Zacks Electronics – Testing Equipment Industry outperformed the Zacks S&P 500 Composite, but outperformed the broader Zacks computer and technology sector last year.
Stocks in this industry are up 22.4% overall, compared to the rallies of the Zacks S&P 500 and Zacks Computer and Technology sectors of 15.1% and 36.1%, respectively.
Annual price development
Current evaluation of the industry
Based on the 12 month price / earnings ratio (P / E), which is a common multiple used to value Electronics – Testing Equipment stocks, the industry is currently trading at a value of 28.91 times, the above that of the S&P 500 is 22.51X and the sector is 26.33X.
Over the past five years, the industry has traded 28.91x and 18.30x, with the median trading at 22.85x, as the following graph shows.
Forward 12 month P / E ratio
4 Test equipment inventory to keep a close eye on it
Teradyne: Headquartered in North Reading, MA, the company is well positioned to benefit from the accelerated deployment of 5G. Additionally, his strength in the semiconductor test and system test businesses is a blessing. In addition, the company continues to benefit from its growing presence in the memory market, solid test demand, and a strong product range.
Additionally, the current Zacks Rank # 2 (Buy) company, which is a leading provider of automated test equipment, remains optimistic about the Universal Robots acquisition and its continued design wins. We believe the company is well positioned to take advantage of the significant opportunities in the high-growth wireless testing market. You can see The full list of today’s Zacks # 1 Rank (Strong Buy) stocks can be found here.
Teradyne’s shares in particular are up 54.1% over the past year. The Zacks Consensus estimate for 2020 earnings has been revised up 16% over the past 30 days to $ 4.49 per share.
Price and consensus: TER
AMETEK: Based in Berwyn, PA, the company has benefited from solid contributions from the acquisitions of Gatan and IntelliPower, which are driving growth in the Electronic Instruments segment. In addition, strengthening the company’s momentum in the defense end-market is an important lever.
In addition, the company, which manufactures electronic and electromechanical devices, remains optimistic about its robust position in the medical and healthcare sectors. Zacks Rank # 3 (Hold), which is currently properly executing its four core growth strategies, namely operational excellence, global market expansion, investment in product development and acquisitions, is also expected to continue to support its finances in the near future.
The share in particular rose 21.6% last year. The Zacks Consensus estimate for 2020 earnings has been revised up 3.5% over the past 30 days to $ 3.88 per share.
Price and consensus: AME
Cognex: Based in Natick, MA, the company is benefiting from an increase in demand for its products from large customers. Additionally, the growing momentum of Cognex machine vision remains a major asset due to the ongoing online learning and work-from-home trend that is fueling the need for tablets, laptops, and portable devices.
In addition, the company currently ranked Zacks # 3, which is a developer and manufacturer of vision systems, continues to be well positioned to capitalize on the space of factory automation.
In particular, Cognex achieved a return of 56% over the past year. The Zacks consensus estimate for the 2020 result has been revised upwards by 28.8% to 94 cents per share in the last 30 days.
Price and consensus: CGNX
National Instruments Corporation: The Austin, TX-based company manufactures automated test equipment and software for virtual instruments and benefits from strengthening its design-to-test offering. In addition, the increase in the production ramp of 5G smartphones is a key driver for the company.
In addition, the company with the current Zacks rank 3 remains optimistic about the strengthening of its software position. Additionally, the company’s robust cost-saving strategies are likely to support its financial presence in the near future.
In particular, National Instrument posted a return of 56% over the past year. Specifically, the Zacks Consensus estimate for 2020 earnings has been revised up 7.4% over the past 30 days to $ 1.16 per share.
Price and consensus: NATI
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Teradyne, Inc. (TER): Free Stock Research Report
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