Macroeconomic concerns shouldn't dissuade investors from backing the brighter spots in the electronics sector. Sure, some of the big names have suffered as the economic outlook has darkened, but a few niche product ranges have also soared in popularity.
Manufacturing fortunes have diverged along regional lines, with the US and Asia offering much stronger prospects than the stuttering European economy. That said, the defining factor in such a diverse sector is end markets. Long-term structural drivers have safeguarded defensive plays Halma (HLMA) and Hellermanntyton (HTY): both are supported by product lines that the world simply cannot do without.
Exposure to health, safety and environmental legislation, for example, helps protect Halma from the ups and downs of the business cycle. That explains its pristine record of posting record revenue and profit each year for the past 11 years. On the flipside, in times of market volatility such reliability comes at a high price, with the shares now trading on 23 times earnings.
A cheaper option is Hellermanntyton. Its cables and galvanised steel conduits continue to benefit from higher safety standards and the replacement of metal with lightweight plastics to lower emissions in cars. The company also has market-leading positions in growth areas such as power and data, which have helped keep gross margins at about 43 per cent since 2008.
Life looks pretty rosy for Renishaw (RSW), too, following a positive trading statement at the beginning of the year. The manufacturer of machine-tool probes has received plenty of large orders from Asia, and demand is expected to be even higher now that Apple requires precision measurement and calibration systems for its latest batch of products.
Oxford Instruments (OXIG) and Spectris (SXS) also have plenty of exposure to Asian markets, but both struggled last year. Spectris, which has been suffering due to weak customer demand in the metals, minerals and mining industries, can only pray for some - so far elusive - signs of stabilisation in its slumping end markets. Meanwhile, Oxford will hope recent improvements in trading in the US and Europe will compensate for a slower than expected recovery in Japan and sanctions that are prohibiting sales to Russia. In a brutal January profit warning that sent the shares spiralling by 30 per cent, management said it will do no business with Russia for the rest of the current financial year, ending in March, or next year.
Domino Printing Sciences (DNO) responded to a tough market backdrop by ramping up research spending. This should stand it in good stead when the economic picture eventually improves, but will hold back profits for the time being.
| Company name | Share price (p) | Market value (£) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC View |
| Domino Printing Sciences | 662 | 745m | 16.5 | 3.4 | -18.2 | Hold, 641p, 16 Dec 2014 |
| Halma | 697 | 2.6bn | 23.6 | 1.7 | 12.9 | Buy, 654p 18 Nov 2014 |
| Hellermann-tyton | 313 | 675m | 16.4 | 2.1 | 0.7 | Buy, 307p, 26 Aug 2014 |
| Morgan Advanced Materials | 301 | 858m | 13.6 | 3.5 | -7.5 | Buy, 299p, 03 Dec 2014 |
| Oxford Instruments | 1,100 | 630m | 18.3 | 1.2 | -38.0 | Hold, 1,111p, 11 Nov 2014 |
| Renishaw | 2,370 | 1.7bn | 28.8 | 1.7 | 21.5 | Hold, 1,735p, 24 Jul 2014 |
| Spectris | 2,169 | 2.6bn | 17.0 | 2.0 | -9.0 | Hold, 2,017p, 25 Jul 2014 |
Favourites
We continue to back Halma, whose premium rating we feel is easily justified, and Hellermanntyton, whose exposure to high-margin, long-term structural drivers is too good to pass over. Morgan Advanced Materials (MGAM) also merits a mention. The shares are up a modest 5 per cent on our buy tip (289p, 19 Dec 2013), but we expect more upside from bid speculation, a growing order book and the successful shedding of lower-margin segments.
Outsiders
Shares in Oxford Instruments look a bit expensive. A growing order book suggests that years of R&D is paying off, and the improving trading backdrop in the US and UK is also encouraging, but significant headwinds in Japan and Russia make even a much reduced rating of 13 times 2015 earnings hard to justify.
