All the evidence points to automation and the industrial software that powers it being a hot market over the coming decade. However, it's not always easy to find reasonably priced stocks in the sector. That said, I think European automation and robotics giant ABB (ABBN.Y 0.18%), industrial software company PTC (PTC 0.03%), and leading machine vision company Cognex (CGNX -0.03%) are a good value and have excellent long-term growth prospects. Here's why.
ABB is starting to extract full value from its businesses
The European industrial giant has an exciting collection of businesses. For example, its electrification business makes it a beneficiary of the electrification-of-everything trend. It has one of the world's leading robotics businesses and ABB's automation exposure stretches across machine automation, motion control systems, and process automation (processing of raw materials).
These are excellent markets in a world still recovering from the shock to the supply chain created by sustained lockdowns. Simply put, automation provides a solution for companies looking to reduce labor costs. It is a powerful tool for companies looking to re-shore their operations and reduce supply chain complexity.
While ABB hasn't always delivered on its promise in the past, CEO Bjorn Rosengren's appointment in March 2020 has coincided with an impressive improvement in margin performance. ABB's margin of earnings before interest, taxes, depreciation, and amortization (EBITDA) was 11.1% in 2019, but by 2022 it was 15.3%, hitting management's plan for a 15% margin a year ahead of plan.
With margin performance well on track, management forecasts more than 5% revenue growth in 2023, and Wall Street analysts expect mid- to high-teens earnings growth out of ABB over the next couple of years. As such, ABB is an excellent option for industries looking for exposure to exciting long-term trends from a company improving its margin profile following a series of restructuring actions.
PTC empowers the digital revolution in the industrial world
The industrial software company's solutions are pivotal to the digital transformation of the industrial world. Using computer-aided design (CAD) software, its customers can digitally design products and then manage them through its product lifecycle management (PLM) software. In addition, PTC's internet-of-things (IoT) software connects physical assets to the digital world.
As such, PTC and other industrial software companies offer solutions that are an intrinsic part of industrial companies' automation plans. That's why PTC partners with Rockwell Automation. It's also why ABB partners with Dassault Systemes industrial software, and why Siemens has a world-class software business working in tandem with its automation offerings.
While there are some signs of slowing in PTC's bookings, the company recently beat its first-quarter guidance and raised its full-year 2023 guidance. Moreover, its free-cash-flow generation is set to significantly improve in the coming years as the full benefit of its shift to a software subscription model kicks in. Meanwhile, management is making its products available as a cloud-based software-as-a-service (SaaS) option.
Cognex: A recovery will come
The machine vision company had a difficult 2022 because one of its core end markets (logistics, essentially e-commerce fulfillment centers) slumped severely after a few years of torrid growth. In a nutshell, after a period of rapid expansion driven by a surge in e-commerce growth created by stay-at-home measures, companies like Amazon have reined in spending on fulfillment centers as consumer spending cools.
That said, I was intrigued by the guidance given by Rockwell Automation on its first-quarter earnings. Despite a "low teens" decline in e-commerce and warehouse automation in the first quarter, Rockwell expects the industry to be up by "low teens" for the full year.
Similarly, Honeywell believes its warehouse automation business will bottom this year. If Rockwell and Honeywell are correct, then Cognex could see a significant improvement in its logistics orders in the second half. Such volatility is hardly surprising for the company. As you can see below, its revenue growth isn't linear.
Data by YCharts
Aside from logistics, Cognex benefits from spending on electric vehicles (EV) and EV battery-related technology in its automotive end market. However, its third primary end market, consumer electronics, is a wild card. Consumer spending is slowing, but Cognex's consumer electronics customers still need to invest in producing new products.
What's not in doubt is that its long-term revenue trajectory looks positive, and after a 39% over the last year, now looks like an excellent time to pick up some stock.
