Electronics - Manufacturing Machinery Outlook: Prospects Flash Bright

The Zacks Electronics - Manufacturing Machinery industry is benefiting from the ongoing transition in semiconductor manufacturing technology.

The persistent 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 is driving demand for solutions provided by the Electronics - Manufacturing Machinery industry participants.

Semiconductor manufacturers are primarily aiming to maximize manufacturing yields at lower costs. Their target to continuously improve device performance requires faster as well as more powerful and energy efficient semiconductors. This is actually increasing the complexity in semiconductor manufacturing processes that includes depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology and inspection.

The Zacks Electronics - Manufacturing Machinery industry comprises companies that provide a range of solutions to address the entire materials handling system. This includes initial production of process chemistry to transportation and dispensing onto the wafer. Moreover, contamination-free transportation, storage and delivery of materials have gained immense significance in recent times.

Further, the rapid adoption of Internet of Things (IoT) supported factory automation solutions is a key catalyst. The industry participants are benefiting from significant capital investments that semiconductor manufacturers are making on equipment to keep pace with advancements in semiconductor technology.

Additionally, the strong demand for advanced packaging that enables the miniaturization of electronic products is driving growth for companies in the Zacks Electronics - Manufacturing Machinery industry.

Industry Performance Has Room to Run

However, looking at shareholder returns over the past year, it appears that the ongoing trade tension between the United States and China, and growing U.S. protectionism has been dampening sentiment on the Electronics - Manufacturing Machinery industry.

Notably, most of the semiconductor manufacturers are based in China, Korea, Taiwan and Japan.

The Zacks Electronics - Manufacturing Machinery Industry has underperformed the Zacks S&P 500 Composite but outperformed the broader Zacks Computer And Technology Sector over the past year.

While the stocks in this industry have collectively climbed 13.7%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 14.2% and 10.9%, respectively.

One-Year Price Performance



The outperformance can be attributed to the strong demand for solutions that are essential in effectively managing the growing complexity of semiconductor manufacturing.

Electronics - Manufacturing Machinery Stocks Appear Cheap

Since there has been an exponential surge in debt level since 2013, it makes sense to value the industry based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because this valuation metric takes into account the level of debt.

For capital-intensive companies, the EV/EBITDA is a preferable valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.

Valuation of the Electronics - Manufacturing Machinery industry is really cheap now. The industry currently has a trailing 12-month EV/EBITDA ratio of 13.63X, which is below the high of 17.19X in the past year and the median level of 15.01X. Clearly, the aggregate valuation picture for the space appears inexpensive.

The space also looks quite cheap when compared with the market at large as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 17.23X and the median level is 18.29X.