The negative effects of the U.S. trade conflict with China and the COVID-19 pandemic have put reshoring firmly on the agenda for many manufacturing companies. After all, if you've been hit with increased costs due to tariffs through sourcing product from China and/or supply chain disruptions due to COVID-19, then it makes sense to start thinking about manufacturing and sourcing locally.
Let's take a look at four companies that stand to benefit from this response.
1. Rockwell Automation
The issues around the supply chain created by the pandemic are only likely to accelerate a movement that's already in place. It's an issue close to President Trump's heart and, according to reports, the administration is looking at ways to give incentives to companies bringing manufacturing back to the U.S.
Rockwell Automation (NYSE:ROK) is likely to be a big winner from any shift in manufacturing activity back to the U.S. If companies are going to shift production to higher-wage-cost countries, then they will have to find other ways to increase profitability -- and one way is through the use of robotics and automated processes. That's where Rockwell comes in.
It's not the largest factory automation company in the world -- Siemens, ABB, and Schneider (all European companies) are bigger -- but with 61% of its second-quarter sales coming from North America, it is the best way to play the U.S automation market.
As previously discussed, Rockwell is taking a hit from the COVID-19 pandemic, but its best days are still to come. That said, it's hard to get too excited by a company trading on 25 times its 2019 earnings of $8.67 per share, especially as analysts don't expect it to surpass that level until its fiscal 2022. All told, Rockwell is an interesting stock, but it's one for the watch list for now.
If the third industrial revolution involved automation and computerization, then the fourth will add the use of digital technologies and the Internet of Things (IoT) as an integral part of production. Again, if reshoring occurs, it's highly likely to have investment in digitization as part of it, not least because manufacturing is seen as being the biggest beneficiary of the IoT revolution.
Leading players in the industrial software space include companies like Rockwell's partner PTC (NASDAQ:PTC) and ABB's partner Dassault Systemes, while Siemens has its own in-house software capability. PTC is seeing strong interest in its augmented reality and IoT solutions, which enable companies to use digital technology to better manage their physical assets.
Moreover, there's a strong case for arguing that the COVID-19 pandemic will also increase the adoption of PTC's solutions, such as augmented reality allowing equipment to be inspected without the key specialist even being on-site.
3. MSC Industrial
An increase in activity will provide a boost to old economy stocks as well. In this scenario, the industrial supply companies are an obvious port of call. MSC Industrial (NYSE:MSM) distributes metalworking, maintenance, repair, and operations (MRO) products and services. As such, its sales are highly sensitive to industrial activity, and in particular, heavy and light manufacturing -- 70% of its sales go into these two markets.
MSC operates in a highly fragmented but consolidating industry, and it has increasingly been focusing on servicing large customers in recent years. That should stand it in good stead if manufacturing activity picks up in the long-term because it will be larger, more international, companies that are likely to bring manufacturing back to the U.S.
4. Kansas City Southern
Manufacturing returning to the U.S. also implies a benefit to other members of the United States-Mexico-Canada Agreement (USMCA), and that's where Class 1 railroad Kansas City Southern (NYSE:KSU) comes in. The railroad connects the industrial cities of Mexico with commercial and industrial markets in the U.S. So, if manufacturing activity picks up in the U.S., then it's likely to make it more viable to source low-cost products from Mexico in the future.
In addition, the U.S. could export more high-end finished products to Mexico. It's a mutually beneficial relationship between the two countries that Kansas City Southern will benefit from. Moreover, the railroad is an interesting stock in its own right, thanks to the operational improvements being implemented as part of its precision scheduled railroading initiatives.
While there's no guarantee that significant reshoring will take place, if it does, then Rockwell, PTC, MSC Industrial, and Kansas City Southern are well-placed to benefit. In addition, they are all stocks that depend on overall growth in the economy, so investors can think of them as being cyclically aligned stocks containing the possibility of a growth kicker if reshoring happens. That's something for investors to consider.