This Hot Trend Should Lead Investors to Reach for the Buy Button

Demand for automation will likely stay strong, even during an economic slowdown, because it enhances productivity. In addition, after a few years where industrial companies have struggled with overly complex supply chains stretched across far-flung corners of the world using multiple suppliers, it makes sense to invest in technology that makes it easier to re-shore production. That's why companies like Rockwell Automation (ROK 1.22%), Emerson Electric (EMR -0.28%), and Siemens (SIEGY 1.32%) are seeing strong growth. Here's why automation is a significant sector to invest in.

Strengthening trends

It's no secret that growth is slowing in 2023, and that's usually bad news for automation companies that rely on their customers' capital spending plans -- which are among the first things that tend to get cut in a slowdown. 

However, the economy has been far from normal over the last few years, and the powerful underlying growth drivers (touched on above) remain in place. Simply put, the productivity gains implied by shifting to automated production and the need to create less complex and more flexible supply chains mean that automation demand remains strong. 

Image source: Getty Images.

For example, the table below shows Rockwell Automation's end market outlook for 2023 in November and January. Instead of the outlook worsening (as you might expect in s slowdown), Rockwell's outlook improved. It's also manifest in Rockwell's own organic growth guidance for 2023, which is now expected to be 11%-15%, compared to prior guidance for 9%-13%.

Readers should note that specific industries here, notably automotive and chemicals, will face significant challenges in 2023 but are still spending on automation. Moreover, the e-commerce and warehouse automation segments were actually down low teens in its first quarter. Hence management's full-year guidance implies a strong bounce back -- possibly good news for Cognex and Honeywell. 

Data source: Rockwell Automation presentations.

Emerson Electric and Siemens

The outlook at Emerson Electric is not quite as strong. Its management expects mid-single-digit growth in discrete automation, mid-to-high-single-digit growth in hybrid automation, and mid-single-digit growth in process automation. In February, Wall Street analysts enquired about the discrepancy between Rockwell and Emerson's outlooks on the latter's earnings call. Emerson's CEO Lal Karsanbhai said, "I feel that the indications we've given are fair based on what we've seen this in the marketplace today."

Whether you take Emerson or Rockwell's industry outlook as a benchmark, it's still an excellent outlook in a slowing economy. 

It's also an outlook confirmed by European industrial giant Siemens' in its first-quarter earnings report in February. Siemens' digital industries business comparable revenue grew 15% in the quarter, with discrete automation up 24% and process automation up 14%, and the digital industries business ended the quarter with a record 14 billion euro backlog. 

Consequently, management now expects digital industries to grow comparable revenue by 12%-15% in 2023 (similar to Rockwell's outlook) compared to prior guidance of 10%-13%.

Image source: Getty Images.

Investing in automation

It's an attractive market, and that's why Emerson Electric's management is restructuring the company toward it and making a multi-billion-dollar bid for a company in adjacent markets. 

It's also a market demonstrating the potential to grow through the economic slowdown; as the adoption of automation and associated digital technologies (that enhance automation productivity) grows, it's likely to spur more investment. 

As such, it's a rare pocket of absolute strength in the economy, and investors should look favorably at investing in it.