The Best Way to Profit as Robots Increasingly Replace Humans

To borrow from a famous action film, this decade will witness the Rise of the Machines. Research firm TechNavio expectsthe Global Industrial Robotics Market to post a compound annual growth rate of 6.42% during the period of 2013-to-2018.

The surest way to wealth is to pinpoint a trend with irresistible momentum and find the leading company behind it. One such multi-year trend is robotics, of which ABB (ABB - Get Report) occupies the vanguard.

 ABB data by YCharts 

ABB is a mega-cap industrial company that's a dominant developer of advanced robotics, based on its installation so far of 250,000 robots worldwide. However, most investors mistakenly view the company as a conventional cyclical play, a widely shared myopia that makes the stock cheap right now. The stock is among a group of "game changing" technological innovators that will deliver market-beating growth over the long haul.

Founded in 1883 and headquartered in Zurich, ABB was designated last month as among the "Top 10 Robotics Companies in the World" by China Daily, the widest print circulation of any English-language newspaper in China (over 200,000 copies per issue). With more than a third of its copies sold abroad, the newspaper is often used as a guide to government policy, and China is a huge market for robotics.

ABB's robotics division has about 4,600 employees in 53 countries around the globe. Its facilities for research and development (R&D) and manufacturing are located in China, the Czech Republic, Japan, Norway, Mexico, the United States, and Sweden.

Robotics is permeating a host of industries, even those that ordinarily wouldn't seem in need of the technology. Notably, retail companies such as Amazon, Wal-Mart and Costco are increasingly automating their distribution capabilities, especially as e-commerce grows in emerging markets such as China and supply chains become more attenuated. As the leading robotics vendor, ABB should reap most of the spoils in coming years.

With a market cap of $40.1 billion, ABB is a global diversified powerhouse that's also a "go to" company when construction activity picks up. A manufacturer of electrical equipment for utilities and industrial customers, ABB operates through five divisions: Power Products, Power Systems, Discrete Automation and Motion, Low Voltage Products and Process Automation.

Four out of the five of divisions at ABB generate about 20% of revenue, a diversification that bestows stability during economic downturns. But it's when the economy picks up that ABB really shines.

ABB consistently spends heavily on R&D, as it combines conventional manufacturing muscle with advanced high technology. Investors do well by focusing on far-sighted tech companies that are devoted to robust R&D.

In 2014, 2013 and 2012, ABB invested $1.49 billion, $1.47 billion and $1.46 billion, respectively, or about 3.8%, 3.5% and 3.7%, respectively, of its annual consolidated revenue on R&D. ABB is plowing considerable R&D into its robotics division, which now accounts for about 20% of total revenue.

R&D intensive companies in the forefront of new technology trends should prosper next year, as North America's recovery continues and a moribund Europe begins to revive under monetary stimulus.

ABB's management is positioning the company to reap long-term growth from the increasing transfer of manufacturing capabilities to robots. Meanwhile, ABB's product mix heavily relies on late-cycle companies that gain traction during the later stages of economic recovery. The fortunes of these late bloomers should rise as recovery picks up steam in 2016.

ABB's diversification has held it in good stead amid difficult conditions in certain regions such as Europe and China. In the third quarter, the company reported earnings of $577 million, whereas analysts had expected earnings to fall 28% to $527 million.

The company was able enhance its operating profits through cost cutting and improved performance in Robotics and in its Power Systems segment that builds projects such as offshore wind farms. Operational EBITA margin increased 50 basis points to 12.5% and operational earnings per share rose 2%.

However, because of temporary regional headwinds right now, the stock has a trailing 12-month (TTM) price-to-earnings (P/E) ratio of only about 16.9, compared to about 19 for its industry. The stock's TTM earnings-per-share (EPS) stands at 1.07, compared to the average of 0.41 for its peers.

ABB looks like a great buy now. And if you're looking for other exciting ideas in the high-technology sector, I've found a small company that has the potential to surge at least 100% in 2016. This is a growth story with major momentum, so it's important to learn the full details as soon as possible inside my free report. The stock is trading under $8 a share, and its long-term prospects have never been better, making it a great value at today's price. Make sure you click here now to learn more.

By John Persinos

Source:http://www.thestreet.com/story/13393704/1/the-best-way-to-profit-as-robots-increasingly-replace-humans.html