Advancements in automation and robotics have led to efficiency improvements, higher-quality jobs, and economic growth. The next stage in automation conjures up fears of job loss. However, many companies are using automation to cut out repetitive tasks -- leading to a higher quality of life and a better experience for their customers.
Trimble (TRMB -0.50%), Walmart (WMT 0.57%), and United Parcel Service (UPS 0.53%) are three well-known companies that are investing in automation. Automation is a core function of Trimble's integrated suite of industrial and commercial products. Meanwhile, Walmart and UPS are using automation to improve profit margins. Here's what makes each industrial stock worth a look.
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Position your portfolio for growth with Trimble
Scott Levine (Trimble): From self-driving cars to robot vacuums, automation in numerous forms is becoming an increasingly visible part of our lives. And it will continue to do so for years to come. It's no surprise, therefore, that forward-looking investors are searching for ways to invest in automation-related stocks -- stocks like Trimble.
A leader in geospatial positioning, Trimble offers solutions that enable a variety of industries to benefit from autonomous technology. Agricultural companies, for example, employ Trimble's solutions to make more effective use of their farming equipment, including autonomous planters, seeders, and sprayers. Construction companies are also implementing Trimble's automation solutions. Giving the machines more on-site responsibilities, construction companies are able to reduce labor costs while also improving employees' safety -- and efficiency.
Regarding its financials, Trimble experienced some challenges in 2022. It reported a nominal year-over-year increase in revenue, and operating cash flow declined 48% compared to 2021. The challenges, however, aren't reflective of fundamental flaws in the company's business. Despite the hiccup, Trimble didn't end 2022 in a perilous position; for example, it had a conservative net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 1.4.
Looking ahead, management sees improvements in the financials for 2023, forecasting adjusted earnings per share and free cash flow to both rise compared to 2022.
Falling more than 30%, shares of Trimble have taken a hit as investors wrestle with fears of a recession. While this may be disconcerting for shareholders, patient investors can take advantage of the stock's recent performance and pick up shares at a discount. The stock currently trades at 18 times forward earnings, representing a discount to its five-year average forward-earnings multiple of 22.6.
Automation headlined Walmart's 2023 investors' meeting
Daniel Foelber (Walmart): Last week, Walmart announced a new five-year plan centered around automation. Walmart expects 4% sales growth over the next five years, which would add more than $130 billion in sales. By the end of fiscal 2026, the company "believes roughly 65% of stores will be serviced by automation, approximately 55% of the fulfillment center volume will move through automated facilities, and unit cost averages could improve by approximately 20%."
Companies like Walmart have limited ways to grow their top and bottom lines. Walmart relies on an incredibly efficient supply chain and high sales volumes to compensate for its razor-thin margins. Walmart's trailing-12-month operating margin is just 3.34%, which means it's taking home a little over $0.03 on the dollar in operating income for every dollar in sales. A single percentage point increase in operating margin would mean a 30% or so increase in operating income for Walmart.
WMT Operating Margin (TTM) data by YCharts
Automation may open the door to cost improvements and reverse a brutal downward trend in Walmart's profitability. Its operating margin is at a 10-year low. Granted, the company's revenue is 30% higher than a decade ago. But Walmart would like to see revenue grow without taking a toll on its operating margin.
Walmart's automation efforts are mostly centered around improving its supply chain between distribution centers and stores that can better adapt to changing customer demand. The company also said it believes automation will lead to higher-paying jobs that require less physical labor. Put another way, it wouldn't be surprising if Walmart's employee count goes down, but average wages go up.
Walmart is a Dividend King with 50 consecutive years of dividend increases. The company's forward price-to-earnings ratio of about 25 is by no means cheap. And Walmart's dividend yield of 1.5% is quite a bit lower than other Dividend Kings.
Walmart has been making headlines for its heightened investment in automation. The stock is going to start to look a lot more affordable if its operating margin improves. For investors who believe Walmart is headed in the right direction and aligning the right long-term investments, the stock may be worth buying now. But there's also nothing wrong with keeping the stock on your watch list until the margin decline trend reverses.
Automation is helping improve UPS' profit margin
Lee Samaha (UPS): Package delivery giant UPS is ramping up its capital spending plans. A big part of that will be toward automated facilities and rolling out smart package facilities in the U.S.
The transportation company is doing so to increase productivity and help offset rising compensation and benefit costs. In addition, automated facilities will help ease the strain of labor shortages. In its SEC filings, the company states, "spending on buildings, facilities, and plant equipment increased, largely due to facility automation and capacity expansion projects in our global small package business."
Data source: UPS presentations.
These investments in automation matter because they help to reduce UPS' cost per piece and improve its ability to service its customers. For an example of how smart facilities cut costs, the company told investors that UPS' misloads (packages loaded incorrectly) were running at one in 400, but with "the smart pack smart facility will be up in one in 800." CEO Carol Tomé noted that UPS now has "50 buildings, where the misloads are now one in 1,000" that have smart packaging facilities.
While these details may seem minor, they are actually key drivers of productivity improvements. Given the enormous volumes UPS delivers (21 million packages a day in the U.S. domestic segment alone in the fourth quarter), the improvements in using automation and smart facilities are significant and part of the long-term margin expansion story at UPS.
