Zacks Industry Outlook Highlights KLA, Flex and Bel Fuse
For Immediate Release
Chicago, IL – November 22, 2023 – Today, Zacks Equity Research discusses KLA KLAC, Flex FLEX and Bel Fuse BELFB.
Industry: Electronics
Link: https://www.zacks.com/commentary/2187347/3-electronics-stocks-to-buy-from-a-challenging-industry
The Zacks Electronics – Miscellaneous Products industry has been suffering from challenging macroeconomic conditions, high levels of inventories with distributors and steep interest rates. The global economic turmoil is expected to keep the semiconductor capex under check, which does not bode well for industry participants in the near term. However, players like KLA, Flex and Bel Fuse are benefiting from higher spending on advanced technologies, including augmented reality (AR) and virtual reality (VR).
Continuing investments in data centers, high-performance computing and 5G end markets are the key catalysts. Fab (foundry) expansion in the United States, South Korea, Taiwan and China, as well as higher spending on memory equipment, is expected to drive growth in 2024 and beyond. Easing supply-chain constraints also benefit industry participants.
Industry Description
The Zacks Electronics – Miscellaneous Products industry includes a number of original equipment manufacturers of air-conditioning systems, green energy solutions, remote-control systems, GPS navigation, home automation systems, healthcare devices, industry/factory automation, robotics, semiconductor and optical applications, and energy management solutions. The industry is evolving on digital transformation and the growing demand for silicon across multiple markets.
The increasing cost of manufacturing bodes well for equipment suppliers, while the growing demand for silicon is a positive for semiconductor companies. Apart from the United States, companies in this industry are based in Japan, Germany, the Netherlands and Switzerland. These companies either have manufacturing operations in China and South-East Asia or generate significant revenues from these regions.
3 Trends Shaping the Future of the Industry
Solid Capital Spending Drives Prospects: Technology transitions are driving product complexities, which are raising the demand for solutions provided by industry participants. Increasing investment on expanding manufacturing capacity by semiconductor companies is a key catalyst in the long run (irrespective of the near-term hiccups due to the challenging macroeconomic conditions).
Since semiconductor companies are the major customers of miscellaneous electronics product manufacturers, the trend bodes well for industry participants. In addition, rising spending on advanced nodes — 7 nm, 5 nm and 3 nm processes from logic and foundry customers — favors industry participants. Notably, logic and foundry spending is anticipated to be healthy this year.
Emerging Markets of Wearables, AR & VR Drive Growth: Industry participants are riding on strong demand for wearables, and AR and VR-supported display systems in defense, industrial, consumer applications and healthcare end markets. The adoption of AR and VR is increasing due to the growing proliferation of the metaverse.
Challenging Macroeconomic Conditions are Headwinds: Industry participants are suffering from a challenging macroeconomic condition globally, with enterprises showing reluctance in committing to multi-year deals. Raging inflation and unfavorable forex trends do not bode well for industry participants.
Zacks Industry Rank
The Zacks Electronics – Miscellaneous Products industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #157, which places it in the bottom 37% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates bearish 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 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 pessimistic about this group's earnings growth potential. Since Feb 28, 2023, the industry's earnings estimates for the current year have moved south by 6.6%.
Given the lackluster prospects, there are a limited number of stocks worth watching in the industry. But before we present a few of those stocks, let's take a look at the industry's recent stock-market performance and valuation picture.
Industry Beats S&P 500, Lags Sector
The Zacks Electronics – Miscellaneous Products industry has outperformed the S&P 500 Index but lagged the Computer & Technology sector in the past year.
The industry has returned 15.5% during this period compared with the S&P 500 composite's gain of 14.9% and the broader sector's return of 37.4%.
Industry's Current Valuation
On the basis of the forward 12-month P/E, which is a commonly used multiple for valuing Electronics-Miscellaneous products companies, we see that the industry is currently trading at 16.77X compared with the S&P 500's 19.09X and the sector's forward-12-month P/E of 24.45X.
Over the last five years, the industry traded as high as 20.26X and as low as 10.27X, with the median being 15.85X.
Stocks to Buy Right Now
Flex: This Singapore-based company offers advanced manufacturing solutions and supply-chain services throughout the product lifecycle development, including fulfillment, after-market support and circular economy solutions.
Flex's performance is gaining from momentum across its automotive business due to program wins and steady vehicle content expansion. The company's industrial segment is likely to benefit from solid demand for EV charging, automation and cloud/critical power. Its digital healthcare segment is expected to benefit from several program ramp-ups and long-term secular trends.
FLEX shares have gained 32.1% year to date. The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company's fiscal 2024 earnings has increased 3.6% to $2.56 per share over the past 30 days. You can see the complete list of today's Zacks #1 Rank stocks here.
KLA: This Zacks Rank #2 (Buy) company is an original equipment manufacturer (OEM) of process diagnostics and control (PDC) equipment and yield management solutions required for the fabrication of semiconductor integrated circuits (ICs) or chips.
The San Jose, CA-based company is benefiting from the strong performance of the wafer inspection business owing to rising demand for advanced wafer inspection applications in leading-edge technology development. Additionally, growing investments across multiple nodes and rising capital intensity in Foundry & Logic are driving top-line growth.
The consensus mark for fiscal 2024 has increased 5.8% to $23.34 per share over the past 30 days. KLA shares have jumped 49.9% in the past year.
Bel Fuse: This Zacks Rank #2 company designs and manufactures products that power, protect and connect electronic circuits.
Bel Fuse has been benefiting from a diversified portfolio that caters to a broad array of end markets. This New Jersey-based company's Connectivity Solutions business is benefiting from strong demand across the commercial aerospace and defense end markets.
BELFB shares have gained 46.1% in the past year. The Zacks Consensus Estimate for Bel Fuse's 2023 earnings has jumped 13% to $6.28 per share over the past 30 days.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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KLA Corporation (KLAC) : Free Stock Analysis Report
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