Valuation of the Precision Instruments Industry

Weekly Corporate Growth Report, Feb 28, 2005 by Dolbeck, Andrew

The precision instruments industry, SIC Group 38, includes companies that manufacture instruments for measuring, testing, analyzing, and controlling, and their associated sensors and accessories. The industry covers the manufacture of a wide variety of devices, such as optical instruments and lenses; surveying and drafting instruments; meteorological and geophysical equipment; guidance systems; surgical, medical, and dental instruments; ophthalmic goods; photographic equipment and supplies; and watches and clocks. The industry makes navigation equipment for military and aerospace clients, laboratory equipment and measuring instruments for the scientific community, and surgical equipment for the medical industry.

Industry Overview

Overall, the industry saw strong demand in 2004. Industry shipments in 2004 were considerably higher than in the previous year. Demand for precision instruments is difficult to measure, due to the wide range of clients supported by the industry. Some industry sectors, such as the photographic equipment segment, make goods primarily for individual consumers, while others support either manufacturers or research institutions.

Employment levels have risen since the economic downturn a few years ago. Rising employment typically leads to increased consumer spending. With the economy recovering, manufacturers can also be expected to expand production, especially after working through inventory surpluses created during the recession. Manufacturers are likely to spend on new and improved products to remain competitive. New product development often requires new testing and measurement devices used for quality control and reducing production expenses. All these factors indicate that overall demand for precision instruments should remain strong in 2005.

Medical Equipment

While most other industries have seen strong earnings increase with the economic turnaround, the healthcare industry's fortunes have not risen as quickly. As a result, equipment for medical research and procedures may not see the same level of demand as other segments of the precision instruments industry.

Demand is currently on the rise, however. According to market research firm Datamonitor, the total healthcare equipment and supplies market reached $259.9 billion in 2003, an increase of 3.3% over the previous year. The surgical and medical equipment segment saw the most demand, followed by the catheters, syringes and needles segment and the dental equipment segment. Datamonitor predicts the healthcare equipment market will reach $328.8 billion in 2008.

Increases in human longevity are generating demand for medical equipment used to care for an aging population. Demand for orthopedic implants remains strong, reflecting increasingly older and more active populations in the developed world. Sales of the cardiac rhythm management devices such as defibrillators and pacemakers are also on the rise. Medical device maker Medtronic saw a 17 percent increase in earnings in its last fiscal quarter, led by strong sales in its cardiac rhythm management and spinal product lines.

Photographic Equipment

Traditional photographic equipment has been challenged by the rise of digital photography. Camera and film makers have been forced to adapt to meet this challenge. The Eastman Kodak Company, long known primarily as a maker of photographic film, has proven up to the test. Kodak took the US market share lead in the sales of digital cameras in 2004, according to market research firm IDC. Kodak had 22 percent of the US market, ahead of 2003's market leader Sony Corp., which had 19 percent.

While Kodak's traditional film products have declined, the company has pushed hard to develop in other areas, including digital printing, health-care imaging, and consumer camera equipment. The need to develop in new areas has driven Kodak to acquisitions. The company has been buying up other firms since 2003. Recently announced Kodak acquisitions include Kodak Polychrome Graphics (previously a joint venture with Sun Chemicals) and Canadian digital printing technology company Creo Inc.

Defense Sector Spending

The Department of Defense has given $127 billion to a project called Future Combat Systems. The goal of the project is to develop robotics and automated systems for military applications. Automated equipment is already in use for functions such as digging up landmines. Unmanned aircraft capable of firing on ground targets are already being tested. Future developments under consideration include advanced remote controlled vehicle and weapons deployment systems.

The development of automated systems will require the creation of sophisticated sensors and control systems, creating further demand for the precision instruments industry. The current military plans call for investing billions of dollars into the Future Combat Systems project.

Outlook

The diversity of the precision instruments industry makes forecasting difficult. With the economy recovering, demand for both the commercial and consumer sectors is likely to remain strong. Demand may also be driven by the development of new technologies in many sectors, including medical, photographic, and defense.