Written by: Jeremie Capron For investors looking for a shining star within a stock market that many consider to be overvalued and possibly poised for a slide, it’s time to take a closer look at today’s hottest sector: robotics, automation and artificial intelligence, or RAAI (pronounced “ray”). Much more than just a buzzword, Bloomberg recently reported that the number of companies mentioning the words “artificial intelligence” on their earnings calls has jumped from about 50 two years ago to more than 200 at the end of 2016, and the numbers continue to grow with each new quarter.Why all the buzz? Just look at any sector of the economy and it’s clear to see how RAAI is changing the world around us. In healthcare, robotic-assisted surgeries take place every day in operating rooms across the country. Unmanned tractors and mobile robots are changing agriculture as we know it. Energy companies rely on robots to perform delicate, knowledge-based work, from assembling underwater pipelines to perform safety checks to keep human workers safe. And 3D printing has the potential to transform everything from how precision tools are manufactured to how buildings are constructed.Perhaps most impressive of all is the immediate impact of RAAI in manufacturing and logistics. Collaborative robots are already supporting processes and shrinking supply chains, and mobile autonomous robotics are automating labor-intensive warehouse. These and other innovations are enabling manufacturers to meet each new surge in demand, effectively increasing capacity while simultaneously driving down costs. In other words, while RAAI immediately conjures up fantastical futuristic images, its application in the real world is the stuff of every business owner’s dreams. And it’s happening today.The swift adoption of robotics and automation is evident in the stunning growth of the ROBO Global Robotics & Automation Index that measures the performance of companies focused on robotics, automation, and enabling technologies. As of August 15, 2017, the ROBO Global Robotics & Automation Index is up 26% year-to-date, largely outpacing the MSCI All-Country World Index (+12%), the S&P 500 (+10%) and the Nasdaq (+18%). The ROBO Global Automation Index is set to post its strongest earnings per share (EPS) growth since 2011, and all fingers point to a level of growth that is surprising even to those of us who live and breathe the nuances of the sector. While expectations for second-quarter growth were already high at 15-18%, 77% of index members beat consensus estimates, shooting the median EPS growth up to a whopping 24% year over year—more than double the estimates for the S&P 500 in the same period.
So what exactly is driving this rise? And more importantly, will it last?
The earnings growth for the ROBO index is driven by solid sales growth, rather than creative cost saving measures and financial engineering. The success of this rising star is rooted in the simple basics of supply and demand.For the first time in a decade, supply chain capacity constraints are creating bottlenecks for RAAI manufacturers. Looking straight down the supply chain, robotics suppliers around the world reported a continued acceleration in orders. Fanuc
, the world’s top supplier of industrial robotics, was unable to meet surging demand in the second quarter as orders jumped 35% last quarter. Meanwhile sales at Teradyne’s Universal Robotics
, the leading provider of collaborative robots, jumped more than 50% year-over-year. To meet that increase in demand, the companies that supply the major components for industrial robots have had to ramp up as well, resulting in their own double-digit sales growth and capacity issues. Every player in the supply chain is growing at breakneck speed. Suppliers are having to extend lead times for delivery of components like servo-motors, linear motion guides, and compact reduction gears. Case in point: Harmonic Drive
, one of the top suppliers of precision speed reducers, used to improve the accuracy and precision industrial robots, saw orders nearly triple last quarter. Related: Rosie the Robot, Amazon, and the Future of RAAI
The result: median sales growth across the index accelerated to more than 8% last quarter, driven largely by a return to double-digits growth in sensing, actuation and industrial automation. While manufacturing is up across all of the largest markets, demand for factory automation equipment was especially strong in China, a country whose ability to compete globally hinges on how quickly it can upgrade manufacturing quality, streamline production, and increase the output of their manufacturing facilities. Industrial robotics is vital to achieving every one of these imperatives.From end-to-end, the supply chain for RAAI is being pushed to the limit, and that push is expected to continue to drive up sales, revenues, and earnings per share across the index. Better than expected results have led to upward revisions to consensus estimates, with the median 2017 sales growth now standing at 8.5%, up 90bps from a month ago. And while the 12.1% median EPS growth for the current year implies a significant slowdown after more than 20% growth in the first half of the year, over the next three years the median EPS growth is expected to reach 40%.If you’re looking for growth, look no further. Few sectors offer the strong fundamentals that support that level of expansion, yet robotics, automation, and AI seem to be the exception. With the laws of supply and demand on their side, companies in the ROBO Global Robotics & Automation Index look set to continue to outperform expectations.