If you buy stocks in a slowdown, it's a good idea to ensure they will have good growth prospects coming out of any recession. In that context, it's a great idea to look at the industrial automation and software companies that power industrial automation. They represent a growth industry whose best days are yet to come.
Industrial automation, industrial software, and Industry 4.0
To understand the full benefit of automation, it's essential to be aware of something called "Industry 4.0," also known as the "fourth industrial revolution." Simply put, it refers to the confluence of the digital and physical worlds. One example comes from creating a so-called "digital twin" of a physical asset. Say a gas turbine or a bottling plant is digitally twinned. The Internet-of-Things technology generates a mass of data from the physical asset, which is then analyzed digitally and modeled using the twin. In this way, artificial intelligence can better model, guide, and predict the behavior of the physical asset -- ultimately resulting in significant productivity gains and reductions in downtime by better predicting service requirements.
The benefits of automation
It's always tricky to succinctly articulate these concepts. Hence, I thought it would be interesting to refer to what the management of one leading industrial company, Stanley Black & Decker (SWK 1.78%), said recently about its Industry 4.0 opportunity. The tools and hardware company is trying to reduce its manufacturing and supply chain costs, and using automation is one way it can do this.
Speaking at a conference recently, CEO Don Allan said, "If you did a power tool assembly in China or Mexico, you might have 50 to 75 people on the line," and the automated solution the company is running in North Carolina "has about 10 to 12 people on that line." However, the updated version "looks like it's going to get down to 2 to 3 people on the line." While the cost of doing the latter "is almost equivalent to the cost of doing the old line in Mexico," the benefit is Stanley can run an automated line "24/7," as Allan puts it.
In addition to the productivity benefits at a plant level, the ability to create cost-effective facilities enables companies to reduce the complexity of their supply chains and re-shore production. That's a massive plus for a company like Stanley, which suffered from significant supply chain issues in 2022 and the industrial sector. Unfortunately, the pandemic and its associated lockdowns created tremendous stress on supply chains and shortages of products like semiconductors and other components. As such, it's a pretty safe bet that companies will continue to look at investing in Industry 4.0 solutions through any recession.
How to invest in the sector
A few ways to invest in this trend include automation company Rockwell Automation (ROK 0.09%) or larger, broader, industrial companies like Siemens (SIEGY 1.25%) or ABB (ABBN.Y 1.19%) that have substantive automation interests and are refocusing their overall businesses on them. Alternatively, investors can put money into industrial software companies that power Industry 4.0. Siemens has its own industrial software business and ABB partners with French software company Dassault Systemes. Rockwell has a strategic alliance with PTC (PTC 0.89%) and has also invested heavily in the company.
These companies are worth looking at, but Siemens and ABB, although attractive in their own right, are not pure-play automation/software companies. Rockwell is a pure-play automation company, but based on its ratio of enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA), it's hard to make a case for the stock being a great value.
Data by YCharts
However, Rockwell's partner PTC does look like a good value. The company has upgraded its growth expectations for 2022 and is achieving impressive growth in its core computer-aided design and product lifecycle management (PLM) software solutions. Meanwhile, its growth products (Internet of Things and augmented reality; Industry 4.0 specific solutions) are set for long-term growth.
There's no denying that all of these stocks will come under pressure if the economy turns down and near-term orders dry up. But on the other hand, the productivity gains from implementing Industry 4.0 solutions will ensure that they emerge strongly out of any recession and beyond. As such, a stock like PTC is very attractive to buy on a dip.
