The 2 Best Automation and Robotics Stocks to Buy in October

It is no secret that the industrial economy is weak, pressured by relatively high interest rates. Still, in such cases, it makes sense to invest in sectors with a high probability of recovery, which is why robotics and automation stocks should be high on the buy list. cognex (CGNX -0.07%) And Emerson Electric (EMR 0.29%)There are two ways to play this theme.

Two key reasons why these stocks are outperforming

First, there are very positive long-term persistent trends that support investment in automation. If production is to be restored from countries with low labor costs, technologies that increase productivity and quality, such as automation, are necessary. Ongoing advances in the so-called fourth industrial revolution strengthen this claim. These technologies emphasize using artificial intelligence (AI)Internet of Things (IoT) and advanced analytics to improve real-time operations.

Second, the decline in the automation market was exacerbated by rather unusual circumstances. Following the lockdowns, many automation companies faced supply chain and product availability issues that extended the delivery time of products. In response, distributors built up stock to meet increased demand following the lockdowns.

As the economy has slowed down over the past year, the distributor’s focus has been on reducing inventory rather than placing new orders, especially in factory automation.

Cognex Corporation and machine vision

These two factors are clearly evident at machine vision company Cognex. Two of the three major end markets, consumer electronics and automotive, suffered due to relatively high interest rates, and the third, logistics (mainly e-commerce warehousing), is just starting to get better After a deep collapse

Weakness in consumer electronics (Apple traditionally a large customer) and it is understandable for the automotive industry that customers will stop investing in production lines and wait until demand increases. Cognex often books orders for machine vision solutions on production lines as customers invest in increased production or new products.

Lower interest rates will help, and it’s only a matter of time before that happens. Cognex returns It is moving towards the long-term trend line.

CGNX Income (TTM) data Y Charts

This is a market that Cognex management sees growing at 13% per year over the long term, while Cognex sees it growing at 15% per year. In the long term, machine vision adoption rates will increase as manufacturers begin using machine vision to capture data and create real-time actionable insights to improve productivity, quality control and automation.

Emerson Electrical and automation

Automation company Emerson Electric is more focused on process automation (processing of liquids and materials, such as in the oil and gas, mining and chemical industries) than its peers. Rockwell Automation. Emerson Electric generates only 34% of its revenue from discrete or factory automation (automotive, semiconductors, e-commerce warehousing) and hybrid automation (food and beverage, life sciences, etc.).

That’s one reason why it’s trading at a discount to Rockwell Automation; Process automation has traditionally been viewed as lower growth than discrete automation.

Data source: marketscreener.com. EV = enterprise value (market value plus net debt). EBITDA = earnings before interest, taxes, depreciation and amortization. FCF = free cash flow.

However, given the company’s recent shift towards automation, this discount may not be justified. Emerson Electric divested its climate control business and acquired automatic test and measurement company NI for an equity value of $8.2 billion. He also owns 55% shares of the industrial software company. AspenTech Following an agreement to contribute some of its existing software business in 2022.

The portfolio restructuring has increased Emerson’s interest in automation, and the core process automation market has exciting growth drivers including LNG, renewable energy, hydrogen, nuclear, clean fuels, carbon capture and other technologies critical to the clean energy transition.

All told, the combination of industrial software, exposure to discrete/hybrid/process automation, and growth in adjacent markets makes for a compelling proposition for the stock trading at less than 18 times expected earnings in 2025.

Stocks to buy?

Low interest rates will help Cognex and Emerson’s discrete automation sales rebound in 2025. Additionally, distributors must have worked on inventory by then.

The combination would lead Cognex to return to near the long-term expected 15% growth rate and Emerson to return to the 4% to 7% revenue growth and double-digit earnings growth that management expects for the company.