The Zacks Electronics - Manufacturing Machinery industry comprises companies that provide a range of solutions to address the needs of wafer processing facilities as well as device packaging and test facilities of semiconductor manufacturing processes.
The solutions offered by the industry participants include thin-film processing systems, photonics, process control tools (that perform macro defect inspections and metrology), metal organic chemical vapor deposition, advanced packaging lithography, wet etch and clean, laser annealing, and 3D wafer inspection systems.
A few industry participants also offer microcontamination control products and advanced materials handling solutions. Notably, contamination-free transportation, storage and delivery of materials have gained immense significance in recent times.
Industry participants are benefiting from the ongoing transition in semiconductor manufacturing technology. The demand for advanced packaging that enables the miniaturization of electronic products remains strong. Consistent shift to smaller dimensions, rapid adoption of new device architectures like FinFET transistors and 3D-NAND along with increasing utilization of new manufacturing materials to increase transistor and bit density are driving demand for solutions provided by the industry players. Moreover, emergence of techniques like wafer level packaging (WLP) is anticipated to raise the need for a high-purity manufacturing environment, free of contaminants. The rising demand for clean processing as well as wafer carrier cleaning and conditioning tools is a key catalyst for the industry participants.
The requirement of faster, more powerful and more energy efficient semiconductors is expected to increase rapidly on robust adoption of cloud computing, IoT and AI. Semiconductor manufacturers like Intel (INTC), Samsung, Taiwan Semiconductors are primarily looking to maximize manufacturing yields at lower costs. This is actually making semiconductor manufacturing processes more complex and in turn driving demand for solutions offered by the industry participants. The rapid adoption of IoT-supported factory automation solutions is also a contributing factor. Further, increasing demand for 5G infrastructure is a key catalyst.
However, weakness in the memory market, particularly NAND, due to oversupply and weaker-than-expected growth in end-market demand (primarily smartphones) is a problem for a few industry players. Lackluster smartphone demand in China is also concerning. Moreover, demand for semiconductors is expected to remain weak in the near term. Further, there is not much clarity on recovery due to the uncertainty over timing of any solution to the U.S.-China trade war. To avoid tariffs, a number of companies have shifted production from China, thereby increasing capex, which has negatively impacted capacity expansion. Further, memory-related spending is expected to remain sluggish throughout 2019, which again is a concern for industry participants.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Electronics - Manufacturing Machinery industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #232, which places it in the bottom 9% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since Aug 31, 2018, the industry’s earnings estimates for the current year have plunged 58.7%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags on Shareholder Returns
The Zacks Electronics - Manufacturing Machinery industry has lagged the broader Zacks Computer and Technology sector as well as the Zacks S&P 500 composite over the past year.
The industry has lost 9.2% over this period compared with the S&P 500’s decline of 3% and the broader sector’s fall of 5.6%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Electronics - Manufacturing Machinery companies, we see that the industry is currently trading at 11.60X compared with the S&P 500’s 10.56X. It is also below the sector’s trailing-12-month EV/EBITDA of 10.50X.
Over the last five years, the industry has traded as high as 14.68X, as low as 5.63X and at the median of 10.53X, as the chart below shows.
EV/EBITDA Ratio (TTM)
Despite the trade war and sluggish memory demand headwinds, we expect capital spending on high-performing computing and advanced packaging by semiconductor manufacturers to rise in the remainder of 2019.
Apart from semiconductor capital equipment market, the solutions of the industry providers are in high demand in markets like industrial technologies, life & health sciences as well as research & defense. This is another major growth driver.
None of the stocks in the Zacks Electronics - Manufacturing Machinery industry carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
However, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.
Chelmsford, MA-based Brooks Automation (BRKS) is a provider of automation, vacuum, and instrumentation solutions. The Zacks Consensus Estimate for current-year earnings stayed at 76 cents over the past 30 days.
Price and Consensus: BRKS
Billerica, MA-based Entegris (ENTG) is a leading provider of materials management solutions to the microelectronics industry, particularly, the semiconductor manufacturing and disk manufacturing markets. The consensus mark for its current-year earnings has moved down by a penny to $1.91 over the past 30 days.
Price and Consensus: ENTG
Singapore-based Kulicke and Soffa Industries (KLIC) is a provider of electronic assembly solutions and semiconductor packaging. The consensus mark for current-year earnings remained at 45 cents over the past week.
Price and Consensus: KLIC
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