Industrial automation is an area that can thrive regardless of how the economy looks. When times are good, companies are able to invest more in technology to put themselves ahead of the competition. When times are bad, companies look to get leaner – which means substituting human personnel for cost-saving factory automation systems.
With the threat of recession growing in 2019, industrial automation stocks may prove a great opportunity. Here are 3 top stocks to buy if you want to gain exposure to the potential all-weather opportunity of industrial automation.
Market value: $39.8 billion. Dividend yield: 4.3%. Zurich, Switzerland-based ABB Ltd. (ABB, $19.30) has been shrinking for years, but it now looks primed to grow again. ABB specializes in robotics, electrical equipment, power solutions and automation technologies. Its industrial automation segment serves a host of heavy industries, from oil and chemicals to utilities to pharmaceuticals and food.
ABB late last year announced it would sell 80.1% of its power grid unit for $11 billion in a deal that should close in 2020. That influx of cash will help ABB continue to invest in producing high-tech equipment such as parts-assembly robots, optical sensors and renewable-energy systems.
These investments have ABB on a path to growth, which is why Citigroup upgraded the stock from “Neutral” to “Buy” last September. After years of declining revenues, ABB turned it around with a marginal uptick in 2017, followed by a 4% improvement in 2018. Analysts now expect 5.5% top-line growth this year, followed by another 3% in 2020.
Market value: $20.6 billion. Dividend yield: 2.2%. Milwaukee’s Rockwell Automation (ROK, $177.02) sells both industrial automation hardware and software. Perhaps its best-known brand is its Allen-Bradley line of automation components and integrated control systems that include monitoring products, lighting and motion control, networks security and infrastructure, sensors and power supplies.
Rockwell has been branding itself as creating “the connected enterprise” in advanced manufacturing and signed a strategic partnership with PTC in June that is already delivering products to the market.
Analysts are expecting decent growth looking forward – 4% sales increases both this year and next, but significantly better 11% and 8% bottom-line improvements in 2019 and 2020. It is a bit on the pricey side, however, trading at more than 17 times future estimates and three times sales. The yield isn’t much better than the market, either, at just 2.2% in yield. But it makes up for it in dividend growth; the payout has ballooned by 67% over the past five years.
Edward Jones currently has a “Hold” rating on the stock, and Windau says that “Rockwell’s business is heavily influenced by the health of the industrial economy.” If trade friction forces companies to make more goods in the U.S., he says, business could pick up this year.
Market value: $33.9 billion. Dividend yield: 3.5%. Eaton (ETN, $82.01) – makes industrial electrical systems, fuel systems for airplanes, and car and truck parts. It also has become a leader in the industrial Internet of Things (IIoT), It provides sensors, switches and artificial intelligence for factory equipment to do things such as improve power management and maintain equipment before anything breaks down.
Eaton, like ABB, is expecting modest but steady growth in the years ahead. Analysts are modeling a 3.6% bump in revenues this year followed by 2.2% in 2020, which should result in 9% and 6% growth in profits, respectively.
Speaking of the analyst community, the “pros” have gotten more optimistic about Eaton of late. ETN received an upgrade from KeyBanc analyst Jeffrey Hammond in mid-March, to “Overweight” (equivalent of “Buy”) from “Sector Weight” (equivalent of “Hold”). The analyst says shares trade at an “unwarranted discount” to its peers, and believes that its product mix and focus on organic growth puts it in a place where it can grow regardless of the broader economic environment.
Eaton also offers a nice dividend that yields 3.5% on a 71-cent quarterly payout that has been growing for years and should continue to expand. The company is projecting earnings of $5.70 to $6 per share for the current year; even at the low end, Eaton would be using less than half its profits to fund the dividend.