My Top Electronic Equipment Instruments And Components Stocks For 2015

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Includes: ARW, AVT, AXE, BDC, BHE, CDW, CGNX, CNXN, CTS, DTSI, FARO, FLEX, GLW, IIVI, MEI, NATI, NEWP, OLED, ORBK, ROG, SANM, SCSC, TECD, TEL
by: Stan Stafford

Summary

In this series of articles, I will be reviewing individual industry sectors and selecting my favorite stock picks for 2015.

For Part 21, I will be reviewing the Electronic Equipment Instruments& Components industry sector, taking a look at revenue/earnings growth, valuations, recent performance, and the overall financial stability of companies.

Out of this group of reviewed stocks, my top stocks for 2015 are Arrow Electronics, Methode Electronics, and TE Connectivity.

Overview

In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2015. In Part 1, I reviewed 47 stocks within the Aerospace and Defense industry sector. For part 21, in determining my favorite stocks in this sector for 2015, I will review the following Electronic Equipment Instruments & Component stocks:

  • Amphenol (NYSE:APH)
  • Anixter International (NYSE:AXE)
  • Arrow Electronics (NYSE:ARW)
  • Avnet (NYSE:AVT)
  • AVX (NYSE:AVX)
  • Badger Meter (NYSE:BMI)
  • Belden (NYSE:BDC)
  • Benchmark Electronics (NYSE:BHE)
  • CDW (NASDAQ:CDW)
  • Celestica (NYSE:CLS)
  • Checkpoint Systems (NYSE:CKP)
  • Cognex (NASDAQ:CGNX)
  • Coherent (NASDAQ:COHR)
  • Corning (NYSE:GLW)
  • CTS (NYSE:CTS)
  • Daktronics (NASDAQ:DAKT)
  • Dolby Laboratories (NYSE:DLB)
  • DTS (NASDAQ:DTSI)
  • Fabrinet (NYSE:FN)
  • Faro Technologies (NASDAQ:FARO)
  • FEI (NASDAQ:FEIC)
  • Flextronics International (NASDAQ:FLEX)
  • FLIR Systems (NASDAQ:FLIR)
  • GSI Group (GSIG)
  • II VI (NASDAQ:IIVI)
  • Ingram Micro (NYSE:IM)
  • Insight Enterprises (NASDAQ:NSIT)
  • InvenSense (NYSE:INVN)
  • Itron (NASDAQ:ITRI)
  • Jabil Circuit (NYSE:JBL)
  • Knowles (NYSE:KN)
  • LittelFuse (NASDAQ:LFUS)
  • Mercury Systems (NASDAQ:MRCY)
  • Methode Electronics (NYSE:MEI)
  • MTS Systems (NASDAQ:MTSC)
  • Multi-Fineline Electronix (NASDAQ:MFLX)
  • National Instruments (NASDAQ:NATI)
  • Newport (NASDAQ:NEWP)
  • Orbotech (NASDAQ:ORBK)
  • OSI Systems (NASDAQ:OSIS)
  • Park ElectroChemical (NYSE:PKE)
  • PC Connection (PCCC)
  • Plexus (NASDAQ:PLXS)
  • RealD (NYSE:RLD)
  • Rofin Sinar Technologies (NASDAQ:RSTI)
  • Rogers (NYSE:ROG)
  • Sanmina (NASDAQ:SANM)
  • ScanSource (NASDAQ:SCSC)
  • Te Connectivity (NYSE:TEL)
  • Tech Data (NASDAQ:TECD)
  • Trimble Navigation (NASDAQ:TRMB)
  • TTM Technologies (NASDAQ:TTMI)
  • Universal Display (NASDAQ:OLED)
  • ViaSystems Group (NASDAQ:VIAS)
  • Vishay Intertechnology (NYSE:VSH)
  • Zebra Technologies (NASDAQ:ZBRA)

Step 1

The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I removed the following stocks from further review because of their negative or flat (less than 3%) earnings growth over the past five years:

  • Badger Meter
  • Checkpoint Systems
  • Dolby Laboratories
  • FLIR Systems
  • GSI Group
  • InvenSense
  • Itron
  • Knowles
  • Mercury Systems
  • Multi-Fineline Electronix
  • Park ElectroChemical
  • RealD
  • TTM Technologies
  • ViaSystems Group
  • Zebra Technologies

Step 2

I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat (less than 2%) growth or saw a decline in revenue over the past two years. These stocks include:

  • AVX
  • Celestica
  • Insight Enterprises
  • Jabil Circuit
  • MTS Systems
  • Rofin Sinar Technologies

Step 3

My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1 to focus more specifically on fairly valued/undervalued stocks. These stocks included:

  • Amphenol
  • Coherent
  • Daktronics
  • Fabrinet
  • FEI
  • Ingram Micro
  • Littelfuse
  • OSI Systems
  • Plexus
  • Trimble Navigation
  • Vishay Intertechnology

Step 4

The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.

  Fundamental Score Value Score
Anixter International 9 7
Arrow Electronics 9 9
Avnet 9 9
Belden 8 2
Benchmark Electronics 7 7
CDW 5 10

Cognex

9 5
Corning 9 8
CTS 7 10
DTS 9 7
Faro Technologies 9 4
Flextronics International 7 9
II-VI 9 10
Methode Electronics 10 8
National Instruments 10 10
Newport 8 9
Orbotech 7 10
PC Connection 9 6
Rogers 10 3
Sanmina 5 10
ScanSource 9 10
TE Connectivity 10 10
Tech Data 8 9
Universal Display 7 6

To determine the best stocks for 2015, I'm only taking into consideration stocks with a fundamental score of 8 or higher in both categories. Doing this left me with the following remaining stocks:

  • Arrow Electronics
  • Avnet
  • Corning
  • II-VI
  • Methode Electronics
  • National Instruments
  • Newport
  • ScanSource
  • TE Connectivity
  • Tech Data

Step 5

My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. The following two stocks saw a decline in book value during this time period.

  • Corning
  • Tech Data

Step 6

My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2015. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.

Arrow Electronics

In its last quarter, the company posted a 4% increase in revenue and an increase in earnings per share from $1.69 to $1.88 compared to the same period last year. The company's strong balance sheet and cash flow has allowed it to return shareholder value through stock buybacks as well as make strategic acquisitions that will help ensure continued long term growth.

Recently, the company announced an agreement to buy immixGroup, with an expected closing date in Q2 of this year.

Avnet

For its latest quarter, the company posted a 2% increase in revenue and a 9% increase in earnings per share compared to the same period last year. The quarter was really a tale of two segments, as the company's Electronics Marketing business segment saw a 7% sales increase, while the company's Technology Solutions segment displayed a 5% decrease in sales. For both segments, Asia was a big factor as the region saw the highest increase in Electronics Marketing and the largest decline in Technology Solutions.

II-VI

In its last quarter, the company posted a 3% increase in revenue and a 46% increase in earnings compared to the same period last year. The company ended the quarter with a record backlog and increases in gross/operating margins and return on sales compared to the same period a year ago.

The company issued strong guidance for its next quarter and appears poised to see continued growth in earnings as both its laser solutions and photonics business segments are performing well, more than offsetting the lagging performance of its performance products segment.

Methode Electronics

For its last quarter, the company posted a 9% increase in revenue and an increase in earnings per share from $0.38 to $0.68 compared to the same period last year.

While the company did see higher sales in its Automotive and Power Products segments, its Interface segment posted lower sales and higher development costs. As a whole; however, the company had a solid quarter as consolidated gross margins improved considerably from 20.3% to 27.3% compared to prior year.

The company's Power Products segment was the main driver for growth as its net sales increased by 45% with significant increases in North America, Europe, and Asia.

National Instruments

In its last quarter, the company posted a 11% increase in revenue and a 39% increase in operating income compared to the same period last year.

The company's quarterly revenue was a company record with strong growth across several of the company's products. With a healthy balance sheet and increasing orders, the company appears poised to continue providing significant returns through price appreciation and increased dividends.

Newport

In its last quarter, the company reported a 3% increase in revenue compared to the same period last year and earnings per share of $0.38 which is on par with the same period a year ago.

Each of the company's segments (Scientific Research, Microelectronics, Life & Health Sciences, and Defense & Security) saw significant increases in sales with the exception of Industrial Manufacturing, which saw a 2% decline versus the same period last year.

In February, the company entered into an agreement to acquire FEMTOLASERS, which in combination with its prior acquisition of V-Gen should provide a substantial boost to the company's laser systems market.

ScanSource

In its latest quarter, the company posted a 9% increase in revenue and a 2% increase in earnings per share compared to the same period last year. The company's acquisition of Imago helped lead to the solid results, providing a boost to the company's European market, just as the company's recent acquisition of Network1 should provide future growth in its Latin America market.

TE Connectivity

In its last quarter, the company reported a 4% increase in revenue and a 20% increase in earnings per share compared to the same period last year.

TE Connectivity is undergoing some major changes is its decisions to sell its Broadband Network Solution business along with recent acquisitions will transform the strategic decision making policies of the company moving forward. I believe the company's decision to focus on expanding and improving its connectivity and sensor solution business is the right long term plan. TE Connectivity has shown a strong history over the past ten years of returning shareholder value through price appreciation and dividend growth and I don't expect that to change any time in the near future.

Conclusion

Looking at the chart below, you can see that Methode Electronics, TE Connectivity, and Arrow Electronics have performed considerably better than the other five stocks over the past five years.

ARW Chart

ARW data by YCharts

These three stocks have also had the best earnings growth over the past five years when compared to the other remaining stocks in this group (with the exception of National Instruments, which has had high earnings growth as well).

Another thing I like about these stocks, is that both Te Connectivity and Arrow Electronics have been able to lower its outstanding shares considerably over the past five years, while Methode Electronics has seen just a modes increase of 5% during this time.

ARW Shares Outstanding Chart

ARW Shares Outstanding data by YCharts

But more than anything related to their past, what I really like about these three stocks is that they all have made strong moves, through either acquisitions or long term strategic decisions, that I believe will provide sustainable growth both in the short term and long term.

TE Connectivity is probably may favorite out of the three because not only does it provide great stock price appreciation potential, but it has become a dividend growth option as well. The company has increased its dividend by over 80% over the past five years with consecutive yearly increases, while maintaining a low payout ratio.

For part twenty two of this series, I will be reviewing the Energy Equipment & Services industry sector. As always, I suggest individual investors perform their own research before making any investment decisions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.