The ROBO index of global technology and market leaders in robotics & automation is up 12%1 from its 2022 low, after an unprecedented 38% drawdown from its all-time high reached in November 2021. In the history of the ROBO index, peak-to-bottom drawdowns had ranged from 37% in the COVID-lockdown panic to 33% in the 2018 trade-war industrial recession and 27% in the 2015 energy bust. Meanwhile, ROBO has delivered a 10.5% CAGR since its inception 9 years ago in August 2013, compared to 7.9% for global equities as of 24 August 2022.
This move is largely driven by multiple contractions as opposed to a deterioration in the earnings outlook. The decline from the 2021 high represents a 31% contraction in the aggregate forward PE, from 36x in February 2021 to 25x as of today, in line with the historical average of 24x over the 9 years since inception.
In the meantime, forward sales estimates have increased by 3% over the past 12 months, and earnings estimates have decreased by 4%. This reflects the continued strength of demand for automation technology and solutions and the ability of companies in the ROBO index to cope with rising costs and supply chain challenges.
Earnings season brought record high orders and extended backlogs
The summer earnings season has brought renewed concerns about supply-chain disruptions, the specter of a recession in Europe, and an abrupt decline in early-cycle sectors of the US economy, including housing and automotive. However, it has also brought continued positive news around demand for factory and warehouse automation, with record-high quarterly orders and extended backlogs providing good visibility into the rest of the year. Aggregate sales growth for ROBO index members is set to reach 13% in 2022, driven by Sensing, Computing/AI, Food & Agriculture, and Actuation. This is significantly higher than the 8% average sales growth over the past 9 years, and the 8% expected revenue growth for the S&P500 excluding Energy. And this is despite massive currency headwinds, with the US dollar index now up 13% YTD.
How do Robotics & Automation companies fare in inflationary times?
While inflation is running at multi-decade highs, we know that during prior periods of rising raw material costs, automation companies have performed relatively well. Technology and market leaders have demonstrated the ability to pass on rising costs to customers.
In addition, inflation appears to be primarily due to a constrained supply side - think supply chain challenges and shortages, including labor shortages. Automation tends to be the short answer to these problems. This situation has led business leaders around the world to prioritize automation projects, as reflected in the inflated order books of many ROBO index members. This is also reflected in the whopping 21% increase in capital expenditures expected for the S&P 500 ex-Energy index in 2022, which would mark the largest gap between revenue/earnings growth and capex in decades, according to Empirical Research.
Attractive acquisition targets
Despite uncertainty in financial markets, robotics and automation companies have remained attractive acquisition targets, and two ROBO index members agreed to be acquired in 2022: Vocera, a leading provider of automation solutions in the healthcare industry (Stryker), and, most recently, iRobot, the global leader in robotic vacuum cleaners (Amazon). Since the inception of the ROBO index in 2013, there have been 28 takeover attempts on index members, including these two in 2022, six in 2021, and five in 2020.
Few long-duration stocks in ROBO
Higher rates are likely to be a significant issue for long-duration equities, typically high-growth stocks with earnings expectations far out in the future. Long-duration equities struggle most in higher-rate environments. The good news is that you won’t find much of that in ROBO. The vast majority of ROBO index members operate proven, profitable business models with strong balance sheets. You look at ROBO through the traditional investment factor prism and you see a pronounced tilt to quality. More than 50% of holdings have a positive net cash position.
ROBO does include a small number of very high-growth companies, such as AutoStore, Luminar, iFlyTek, Nvidia, iRhythm and ServiceNow, which are trading on relatively high multiples. In fact, 8 out of ROBO’s 82 constituents trade on an EV/sales multiple greater than 10x.
Lots of cheap stocks in ROBO
ROBO also includes many slow and steady compounders, operating in more mature segments of the market such as factory automation and machinery, that are trading on very low multiples. In fact, 10 out of 82 ROBO members trade on EV/sales lower than 1x. Companies like iRobot, THK, GXO Logistics, Fuji Machine, KION, Cargotec, Krones, and Duerr. From a price/earnings perspective, 6 companies are trading on a single-digit forward PE.
Underweight Europe / overweight Asia
We note that ROBO is underweight Europe and overweight Asia compared with a typical global equity allocation. Japanese companies in particular account for 22% of the portfolio, with many of the world’s leading factory automation equipment and component manufacturers based in the country and serving global markets. We expect their export business to thrive with the JPY having recently declined to a 20-year low relative to the USD.
So far this year, the rise in the US dollar has represented a 5.1ppt headwind, with a JPY exposure of 21%, EUR at 10%, TWD at 6%, and other foreign currencies at 12%, including CHF, GBP, SEK, and CAD.
1 All Data as of August 24th, 2022. Source:ROBO Global®, S&P CapitalIQ