Chicago, IL – November 20, 2024 – Today, Zacks Equity Research discusses Zurn Elkay Water Solutions Corp. ZWS, Eaton Corp. plc ETN, Emerson Electric Co. EMR and Powell Industries, Inc. POWL.
Industry: Electronics Manufacturing
Link: https://www.zacks.com/commentary/2371962/4-manufacturing-electronics-stocks-to-watch-despite-industry-headwinds
The Zacks Manufacturing – Electronics industry has been grappling with persistent weakness in the manufacturing sector, slowdown in new orders and supply-chain disruptions. Rising input costs, restructuring expenses and a tough labor market also create concerns for the industry.
However, the industry is benefiting from steady demand across the electronic services end market and increased adoption of advanced manufacturing technologies. Zurn Elkay Water Solutions Corp., Eaton Corp. plc, Emerson Electric Co. and Powell Industries, Inc. appear well-poised to capitalize on the opportunities.
The Zacks Manufacturing-Electronics industry comprises companies that manufacture electronic products like battery chargers, battery accessories, outdoor cabinet enclosures, power transmission products, electrical motion controls and motive power devices. Some industry players also provide water-treatment products, engineered flow components, process equipment and turn-key systems.
These companies offer state-of-the-art customer support and after-market services to end users. The firms are increasing investments in developing innovative technologies, boosting customer and employee experience, and supply-chain modernization programs. The manufacturing electronic companies sell products and services in various end markets, including robotics, semiconductor, defense, aerospace, medical equipment and satellite communications.
Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been denting demand in the industry. After breaking a 16-month contraction streak by growing in March 2024, the manufacturing sector contracted for the seventh consecutive month in October. Per the Institute for Supply Management’s (ISM) report, the Manufacturing Purchasing Manager’s Index touched 46.5% in October, lower than the 47.2% recorded in both September and August. A figure less than 50% indicates a contraction in manufacturing activity. Also, the New Orders Index remained in the contraction territory for seven consecutive months, registering 47.1% in the previous month.
Supply-Chain Disruptions: Supply-chain disruptions, especially related to the availability of electrical and electronic components, have been concerning for industry participants recently. This is evident from the latest ISM report’s Supplier Deliveries Index, which reflected slower deliveries for the fourth successive month in October. Supply-chain issues, if not controlled, may continue to raise warehouse and other logistics expenses.
Rising Costs Hurt Margins: Industry participants have been encountering input cost inflation and other expenses, denting profitability. A few industry players have been incurring higher restructuring expenses and headcount-related costs. The rise in expenses, along with a tough labor market, poses a threat to margins. However, companies have been focused on cost management initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and implementing effective pricing strategies.
Strength in the Electronics Services Market: Despite a slowdown in manufacturing activities, demand across key end markets has been stable. Electronics manufacturers are steadily benefiting from the higher adoption of advanced manufacturing technologies and processes by original equipment manufacturers.
The requirement for integrating advanced electronic components into machinery and electronic devices has been supporting the electronics manufacturing services market. In addition, a few industry players with wide exposure to the booming medical and life science markets are witnessing a positive momentum across their businesses due to sturdy demand for their products and solutions.
The Zacks Manufacturing – Electronics industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #163. This rank places it in the bottom 35% 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 weak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
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 putting less faith in this group’s earnings growth potential. The industry’s earnings estimates for 2024 have decreased 11.3% over the past year.
Despite bleak near-term prospects, we will present a few stocks that you may want to retain in your portfolios. However, it is worth looking at the industry’s shareholder returns and current valuation first.
The Zacks Manufacturing – Electronics industry has underperformed the broader sector and the Zacks S&P 500 composite index in the past year.
Over this period, the industry has gained 28.5% compared with the sector’s and S&P 500 Index’s growth of 28.9% and 29.2%, respectively.
On the basis of forward 12-month Price-to-Earnings (P/E), which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 26.48X compared with the S&P 500’s 22.13X. It is also above the sector’s P/E ratio of 21.03X.
Over the past five years, the industry has traded as high as 28.43X and as low as 14.78X, with the median being 22.48X.
Zurn Elkay Water Solutions: Based in Milwaukee, WI, the company is a designer, manufacturer and marketer of water management solutions primarily in the United States and Canada. ZWS is poised to gain from the growing awareness of the need for clean, filtered drinking water, solid demand for its products and solutions, and its focus on operational execution.
In the past year, shares of Zurn Elkay Water Solutions have gained 32.9%. The company delivered an earnings surprise of 8.5%, on average, beating estimates in the trailing four quarters. The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2024 earnings has been revised upward by 2.5% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Eaton: Based in Dublin, Ireland, Eaton is a diversified power management company and a global technology leader in electrical components and systems. It is benefiting from rising demand from the new AI data center and contributions from its organic assets. Reindustrialization and megatrends will create more opportunities for Eaton in the near term. ETN currently carries a Zacks Rank #3 (Hold).
The company’s shares have rallied 57.6% in the past year. ETN reported better-than-expected results in each of the last four quarters, the average being 3.6%. The Zacks Consensus Estimate for its 2024 earnings has been revised upward by 0.4% in the past 60 days.
Emerson: Headquartered in St. Louis, MO, Emerson is a diversified global engineering and technology company. It offers a wide range of products and services to customers in consumer, commercial and industrial markets. EMR is benefiting from solid momentum in the Intelligent Devices and Software and Control segments. Strength in the energy and power end markets is aiding the final control business. A strong backlog conversion level is aiding the Measurement & Analytical business’ revenues. The successive acquisitions of Afag and Flexim spark optimism in the stock.
This Zacks Rank #3 company’s shares have rallied 45.9% in the past year. It reported better-than-expected results in each of the last four quarters, the average being 6.7%.
Powell Industries: Headquartered in Houston, TX, the company is engaged in designing, manufacturing and distributing custom-engineered equipment and systems. It has been witnessing several favorable trends across its strong growth across the oil & gas, and petrochemical sectors. Also, solid momentum in the commercial and other industrial sectors is likely to drive its performance in the quarters ahead.
Shares of this Zacks Rank #3-rated company have soared 245.9% in the past year. POWL reported better-than-expected results in the trailing four quarters, the average being 69.9%. The Zacks Consensus Estimate for the company’s fiscal 2025 (ending September 2025) earnings has remained steady in the past 60 days.
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Emerson Electric Co. (EMR) : Free Stock Analysis Report
Eaton Corporation, PLC (ETN) : Free Stock Analysis Report
Powell Industries, Inc. (POWL) : Free Stock Analysis Report
Zurn Elkay Water Solutions Cor (ZWS) : Free Stock Analysis Report