2 Top Automation and Robotics Stocks to Buy in October

It’s no secret that the industrial economy has been weak, weighed down by relatively high interest rates. Still, under such circumstances, it makes sense to invest in industries with a high probability of recovery, and that’s why robotics and automation stocks should be at the top of 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 can outperform

First, there are very favorable long-term secular trends favoring investment in automation. If production is to be relocated from countries with low labor costs, then productivity and quality-enhancing technologies such as automation are needed. Continued advances in the so-called fourth industrial revolution reinforce this argument. These technologies emphasize the use of artificial intelligence (AI), the Internet of Things (IoT), and advanced analytics to improve operations in real time.

Image source: Getty Images.

Second, the decline in the automation market was exacerbated by a highly unusual set of conditions. Following the lockdowns, many automation companies faced supply chain and product availability issues that extended the time it took to deliver products. In response, distributors built up inventory to handle the surge in demand after the lockdown.

With the economy slowing over the past year or so, distributors have focused on reducing inventories rather than placing new orders, particularly in factory automation.

Cognex Corporation and machine vision

These two factors are evident in machine vision company Cognex. Two of the three key end markets, consumer electronics and automotive, have suffered from relatively high interest rates, and the third, logistics (mainly e-commerce warehousing), is just beginning to recover from a deep downturn .

Weakness in consumer electronics (Apple is traditionally a major customer) and autos understandably, as customers are holding back on investing in production lines in favor of waiting until demand picks up. Cognex typically 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 Cognex returns to its long-term trend line.

CGNX Revenue (TTM) data by YCharts

It’s a market that Cognex management sees growing at a 13% annual rate over the long term, with Cognex growing at a 15% annual rate. In the long term, artificial vision adoption rates will increase as manufacturers use it to capture data and create actionable real-time insights to improve productivity, quality control and automation.

Emerson Electric and Automations

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

That’s one reason it’s trading at a discount to Rockwell Automation — process automation is traditionally seen as having less growth than discrete automation.

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

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

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

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

Stocks to buy?

Lower interest rates should help Cognex and Emerson’s discrete automation sales recover in 2025. Additionally, distributors should have been working on inventory by then.

The combination should lead Cognex to return to something close to its expected long-term growth rate of 15% and Emerson to return to the kind of 4% to 7% revenue growth and double-digit revenue growth that management waiting for them for company.