Chicago, IL – September 13, 2023 – Today, Zacks Equity Research discusses Woodward, Inc. WWD, Badger Meter, Inc. BMI and Thermon Group Holdings, Inc. THR.
Industry: Instruments - Control
Link: https://www.zacks.com/commentary/2147645/buy-3-instruments-stocks-as-industrial-automation-gains-precedence
The Zacks Instruments – Control industry is poised to benefit from the surging demand for state-of-the-art technology for replacing obsolete industrial control systems with automated products. In addition, focus on energy-efficient production processes and integrated software systems is likely to be conducive to growth.
However, volatility in commodity prices amid uncertain macroeconomic conditions might hurt the process automation and instrumentation market. Nevertheless, Woodward, Inc., Badger Meter, Inc. and Thermon Group Holdings, Inc. are likely to gain from thrust on digitized technologies, greater emphasis on energy efficiency, focus on cost reduction, adoption of industrial automation and optimum resource utilization.
The Zacks Instruments – Control industry comprises manufacturers of precision and specialty motion control components and systems used in a wide range of industries. These companies deliver sophisticated flow measurement, control and communication solutions for air, water and other forms of gas and liquid used for commercial and residential purposes.
The companies offer an array of products for fuel, combustion, fluid, actuation, electronic applications, energy control and optimization, particularly for the process industry. Some industry players offer heating, ventilation and air conditioning products. These include water heaters and electric heating systems for under-floor radiant applications for boiler manufacturers and alternative energy control packages. Few firms provide water reuse products, consisting of drainage and rainwater harvesting solutions.
Digitized Technologies at the Core: The industry’s growth is largely driven by an emphasis on digitized technologies in manufacturing activities, such as the Industrial Internet of Things (IIoT). The demand for process automation, instrumentation products, safety automation systems and multivariable pressure transmitters for the fast-track manufacturing process is likely to fuel long-term growth opportunities.
The use of process instrumentation equipment offers a host of benefits, including improvement in the quality of the product and emission reduction. So, the rapid adoption of technology across various industries and growing regulation and compliance requirements will continue to be major growth drivers.
In addition, field instruments play a significant role in process control by measuring the key elements such as temperature, pressure, flow and level in process industries such as chemicals, mining and pharmaceuticals. These include transmitters that primarily measure the pressure, flow, temperature, level and humidity of liquids and gases, which are essential for achieving optimum productivity. A differentiated product offering gives greater opportunities for companies to strengthen their market position.
Volatility in Raw Material Prices: Material cost inflation, resulting from incessant inflationary pressures, has affected margins. Transportation costs are also on the rise. Moreover, high raw material prices due to inflation, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the production schedule of various firms.
While the companies are focused on improving their operating performance, the inability to obtain adequate supplies of raw materials and product parts at favorable prices is likely to hurt their businesses. With firms being unable to pass on the entire increase in raw material prices to customers due to stiff competition, profitability is mostly on the wane.
The companies primarily operate in markets that are susceptible to high competitive pressures and are under constant threat by low-cost suppliers, primarily based in China. Due to an international footprint, these firms are further exposed to foreign exchange fluctuations that affect their cash flows. Changes in competitive conditions, including the availability of the latest products and services, the introduction of new distribution channels and changes in OEM and aftermarket pricing, are likely to hamper operations and affect sales.
Rising Adoption of Industrial Automation: Greater focus on increased adoption of automation across all industry verticals and higher investments in new technologies are expected to drive growth over the next few years. North America is expected to continue dominating the market in terms of adopting automation. Rising infrastructural investments in the energy and power sector, increasing demand for organic food and nutritional beverages and favorable government policies are aiding the growth.
The pharmaceutical industry's process automation and instrumentation market are also growing due to low-cost factors and an evolving regulatory environment. Focus on high-quality equipment indicates increasing buyer maturity and willingness to partner with process control industry players.
The Zacks Instruments – Control industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #5, which places it in the top 2% 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 bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few instruments control 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.
The Zacks Instruments – Control industry has outperformed the S&P 500 composite in the past year but lagged the broader Zacks Computer and Technology sector.
The industry has gained 25.5% compared with the S&P 500 and sector’s growth of 13.7% and 26.7%, respectively.
The Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing instruments control stocks. The industry has a trailing 12-month EV/EBITDA of 12.94X compared with the S&P 500’s 13.3X. It is above the sector’s trailing 12-month EV/EBITDA of 12.50X.
Over the past five years, the industry has traded as high as 17.78X, as low as 6.83X, with a median of 12.26X.
Woodward: Headquartered in Fort Collins, CO, Woodward is an independent designer, manufacturer and service provider of energy control and optimization solutions. The company provides a wide array of products for fuel, combustion, fluid, actuation and electronic applications, which serve the commercial aerospace, business jet, military and energy markets. Woodward has been investing significantly in technologies to secure fresh businesses and spending on new manufacturing units and automation equipment to perk up efficiency.
The company plans to shift some of the machine components to its own factories/capable third-party suppliers to reduce cost and lead time, and improve quality. The company also plans on investing $10 million to create machine centers that are expected to solve the problem of component shortage.
The stock has gained 32.1% in the past year. It has a long-term earnings growth expectation of 13.5% and delivered an earnings surprise of 17.7%, on average, in the trailing four quarters. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Badger Meter: Headquartered in Milwaukee, WI, Badger Meter provides flow measurement, control and communications solutions, serving water and gas utilities, municipalities and industrial customers worldwide. The company’s products measure water, oil, chemicals and other fluids, and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data.
With its industry-leading ORION Cellular endpoints, along with communication and software technologies, Badger Meter is focused on creating robust digital solutions to operationalize real-time data into actionable insights. Its BEACON software-as-a-service offering facilitates the collection and analysis of data within the distribution network to improve operational awareness.
The Zacks Consensus Estimate for current-year earnings for this Zacks Rank #2 (Buy) stock has been revised 10.4% upward over the past year. The stock has gained 64.5% in the past year. It has a long-term earnings growth expectation of 15.1% and delivered an earnings surprise of 6.7%, on average, in the trailing four quarters.
Thermon: Headquartered in Austin, TX, Thermon provides engineered industrial process heating solutions worldwide. Its products include air heaters, boilers, controlling and monitoring solutions, heat tracing systems, tank heating systems, thermostats, tubing bundles, enclosure and explosion-proof gas catalytic heaters, gas-fired blowers and gas heating accessories that comprise regulators, valves, mounting brackets and battery cables.
The buyout of Powerblanket has augmented Thermon's exposure to growing industrial and commercial end markets through its freeze protection, temperature control and flow assurance solutions. It has also enabled it to expand into adjacent product lines and increase access to diversified end markets.
The Zacks Consensus Estimate for current-year earnings has moved up 32.8% over the past year. It has a VGM Score of B. This Zacks Rank #2 stock has gained 51% in the past year.
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