Exploring The Present State of The ROBO Index

The ROBO index of world expertise and market leaders in robotics & automation is up 12%¹ from its 2022 low, after an unprecedented 38% drawdown from its all-time excessive reached in November 2021. Within the historical past of the ROBO index, peak-to-bottom drawdowns had ranged from 37% within the COVID-lockdown panic to 33% within the 2018 trade-war industrial recession and 27% within the 2015 vitality bust. In the meantime, ROBO has delivered a ten.5% CAGR since its inception 9 years in the past in August 2013, in comparison with 7.9% for world equities as of 24 August 2022.

This transfer is basically pushed by a number of contractions versus a deterioration within the earnings outlook. The decline from the 2021 excessive represents a 31% contraction within the combination ahead PE, from 36x in February 2021 to 25x as of as we speak, according to the historic common of 24x over the 9 years since inception.

Within the meantime, ahead gross sales estimates have elevated by 3% over the previous 12 months, and earnings estimates have decreased by 4%. This displays the continued energy of demand for automation expertise and options and the power of corporations within the ROBO index to deal with rising prices and provide chain challenges.

Earnings season introduced document excessive orders and prolonged backlogs

The summer season earnings season has introduced renewed issues about supply-chain disruptions, the specter of a recession in Europe, and an abrupt decline in early-cycle sectors of the US financial system, together with housing and automotive. Nonetheless, it has additionally introduced continued optimistic information round demand for manufacturing facility and warehouse automation, with record-high quarterly orders and prolonged backlogs offering good visibility into the remainder of the yr. Mixture gross sales development for ROBO index members is ready to succeed in 13% in 2022, pushed by Sensing, Computing/AI, Meals & Agriculture, and Actuation. That is considerably increased than the 8% common gross sales development over the previous 9 years, and the 8% anticipated income development for the S&P500 excluding Power. And that is regardless of huge forex headwinds, with the US greenback index now up 13% YTD.

How do Robotics & Automation corporations fare in inflationary instances?

Whereas inflation is operating at multi-decade highs, we all know that in prior intervals of rising uncooked materials prices, automation corporations have carried out comparatively effectively. Expertise and market leaders have demonstrated the power to go on rising prices to clients.

As well as, inflation seems to be primarily as a result of a constrained provide facet – assume provide chain challenges and shortages, together with labor shortages. Automation tends to be the brief reply to those issues. This case has led enterprise leaders around the globe to prioritize automation tasks, as mirrored within the inflated order books of many ROBO index members. That is additionally mirrored within the whopping 21% enhance in capital expenditures anticipated for the S&P 500 ex-Power index in 2022, which might mark the biggest hole between income/earnings development and capex in a long time, in response to Empirical Analysis.

Enticing acquisition targets

Regardless of uncertainty in monetary markets, robotics and automation corporations have remained engaging acquisition targets, and two ROBO index members agreed to be acquired in 2022: Vocera, a number one supplier of automation options within the healthcare trade (Stryker), and, most lately, iRobot, the worldwide chief in robotic vacuum cleaners (Amazon). Because the inception of the ROBO index in 2013, there have been 28 takeover makes an attempt on index members, together with these two in 2022, six in 2021, and 5 in 2020.

Few long-duration shares in ROBO

Greater charges are prone to be a major difficulty for long-duration equities, sometimes high-growth shares with earnings expectations far out sooner or later. Lengthy-duration equities battle most in higher-rate environments. The excellent news is that you simply gained’t discover a lot of that in ROBO. The overwhelming majority of ROBO index members function confirmed, worthwhile enterprise fashions with sturdy steadiness sheets. You have a look at ROBO by way of the normal funding issue prism and also you see a pronounced tilt to high quality. Greater than 50% of holdings have a optimistic web money place. 

ROBO does embody a small variety of very high-growth corporations, equivalent to AutoStore, Luminar, iFlyTek, Nvidia, iRhythm and ServiceNow, that are buying and selling on comparatively excessive multiples. Actually, 8 out of ROBO’s 82 constituents commerce on an EV/gross sales a number of higher than 10x. 

A number of low-cost shares in ROBO 

ROBO additionally contains many sluggish and regular compounders, working in additional mature segments of the market equivalent to manufacturing facility automation and equipment, which might be buying and selling on very low multiples. Actually, 10 out of 82 ROBO members commerce on EV/gross sales decrease than 1x. Corporations like iRobot, THK, GXO Logistics, Fuji Machine, KION, Cargotec, Krones, and Duerr. From a value/earnings perspective, 6 corporations are buying and selling on a single-digit ahead PE.

Underweight Europe / obese Asia

We notice that ROBO is underweight Europe and obese Asia in contrast with a typical world fairness allocation. Japanese corporations specifically account for 22% of the portfolio, with most of the world’s main manufacturing facility automation gear and part producers primarily based within the nation and serving world markets. We count on their export enterprise to thrive with the JPY having lately declined to a 20-year low relative to the USD.

To this point this yr, the rise within the US greenback has represented a 5.1ppt headwind, with a JPY publicity of 21%, EUR at 10%, TWD at 6%, and different foreign currency echange at 12%, together with CHF, GBP, SEK, and CAD.

¹ All Information as of August twenty fourth, 2022. Supply:ROBO International®, S&P CapitalIQ