The 2 best shares of companies from the automation and robotics industry to buy in October

It is no secret that the industrial economy is weak under the pressure of relatively high interest rates. However, in such circumstances, it is worth investing in industries where there is a high probability of recovery, so companies from the robotics and automation industry should be high on the shopping list. Cognex (NASDAQ: CGNX) AND Emerson Electric (NYSE:EMR)there are two ways to play this theme.

Two main reasons why these stocks could outperform

First, there are very favorable long-term secular trends supporting investment in automation. If production is to be moved from countries with low labor costs, technologies that increase productivity and quality, such as automation, will be necessary. Continued progress in the so-called Fourth Industrial Revolution strengthens this argument. These technologies emphasize the use of artificial intelligence (AI), the Internet of Things (IoT), and advanced analytics to improve real-time operations.

Image source: Getty Images.

Second, the downturn in the automation market has been exacerbated by an extremely unusual set of conditions. Following the lockdowns, many automation companies experienced supply chain and product availability issues that extended product delivery times. In response, distributors have stockpiled supplies to meet the surge in demand following lockdowns.

Due to the economic slowdown over the past year, distributors have focused on reducing inventory rather than placing new orders, especially in the field of factory automation.

Cognex Corporation and machine vision

These two factors are evident at machine vision company Cognex. Two of the three key end markets, consumer electronics and automotive, have been hit by relatively high interest rates, and the third, logistics (mainly e-commerce warehousing), is only just starting to recover from the deep crisis.

Weakness of consumer electronics (Apple is traditionally a major customer), and the automotive industry is understandable because customers are refraining from investing in production lines in favor of waiting for demand to increase. Cognex typically reserves orders for machine vision solutions on production lines as customers invest in increased production or new products.

Lower interest rates will help, and it is only a matter of time before Cognex returns to the long-term trend line.

CGNX revenue data (TTM) by YCharts

According to the management board of Cognex, this is a market that in the long run will grow at a rate of 13% per year, and for Cognex – 15% per year. In the long term, machine vision adoption rates will increase as manufacturers use them to capture data and create actionable insights in real time to improve productivity, quality control and automation.

Emerson Electric and automation

The automation company Emerson Electric focuses more on process automation (fluid and materials processing, for example in the oil and gas, mining and chemical industries) than, say, its counterpart, Rockwell Automation. Emerson Electric generates just 34% of its revenues from discrete or factory automation (automotive, semiconductors, e-commerce warehousing) and hybrid automation (food and beverage, life sciences, etc.)

This is one of the reasons he offers discounts to Rockwell Automation – process automation has traditionally been viewed as a slower process than discrete automation.

Data source: marketscreener.com. EV = enterprise value (market capitalization 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 shift towards automation. Emerson Electric divested its climate control business and acquired automatic test and measurement business NI for an equity value of $8.2 billion. Additionally, he owns 55% of an industrial software company AspenTech after concluding an agreement to contribute part of its existing software business 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.

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

Shares to buy?

Lower interest rates should help Cognex and Emerson revive sales of discrete automation products in 2025. Moreover, distributors should already have stocked up by then.

The merger should result in Cognex returning to its expected long-term growth rate of 15% and Emerson to the 4-7% revenue growth and double-digit earnings growth that management expects for the company.

Is it worth investing $1,000 in Emerson Electric now?

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Lee Samaha has no position in any of the companies mentioned. The Motley Fool has positions in and recommends Apple, Cognex, and Emerson Electric. The Motley Fool has a disclosure policy.