The global stocks at the forefront of automation

Automation has emerged as a core theme within the sustainable investment landscape, cutting across sectors, regions and market caps, according to Kames Capital’s Craig Bonthron.
Bonthron, co-manager of the recently launched Kames Global Sustainable Equity fund, said while the fund selects holdings on a bottom-up basis, selected on their individual merits, automation is driving returns across a number of positions.
Stocks benefiting from automation have different business models, returns on capital and valuations, while management teams also have different industry perspectives and expertise. Nonetheless, the trend to provide goods and services in the most cost efficient and effective way is always in the minds of good management teams and this is directly and indirectly driving this long-term investment theme, particularly as businesses focus increasingly on improving their environmental and social footprints.
Below Bonthron identifies three stocks benefitting from the automation trend, and how they extract value from it:
Keyence
“Japanese company Keyence, a leading supplier of sensors, laser markers and microscopes, is unique in many ways. The charismatic and eclectic founder and CEO Akinori Yamamoto has built a business that has delivered stable and highly profitable growth in a traditionally cyclical and competitive market place. Yamamoto’s public abhorrence of nepotism and insistence on a culture of meritocracy sets Keyence apart in a Japanese context.
“The stock looks expensive on most traditional multiples if you discount future growth and margins (most analysts assume future growth will fade). But this is where the structural growth of automation plays a key part in the investment case, with slowing growth arguably too conservative an assumption.
“The business model is also hyper responsive and highly customised to customer needs. R&D is the priority and is driven directly by customer requests, which means Keyence avoids price competition and drives 100% of its revenue growth organically. Manufacturing is also efficiently outsourced resulting in industry-leading profit margins, while a young and well-paid workforce provides a virtuous feedback loop into its product development capability.
Mobileye
“Driverless cars, or Advanced Driver Assist Systems or ‘ADAS’ as they are formerly known, certainly capture the imagination. By definition, it is a ‘hot’ theme and therefore can be a risky place to invest.  We are early in the adoption of ADAS and current car models only feature basic ADAS. However, if it follows previous cycles of technology adoption, the next five years should see a phase of super-normal growth, well ahead of current market expectations.
“We have good visibility into how ADAS functionality will evolve over the next half decade because most manufacturers plan their launches years in advance due to rigorous testing and validation.
“Whilst automotive supply is a highly competitive market, Mobileye appears to have established a commanding technological lead via millions more miles driven. This has enabled them to optimise their vision algorithm and bespoke EyeQ chip design, giving 99.999% accuracy rates.  The company focuses on partnership relationships with Tier 1 suppliers, and its dominant position provides a virtuous cycle that allows them to gather more information, further extending their technological lead.
“The result is a fast growing business that is leveraging its relatively fixed cost base and generating very high returns on capital. Whilst optically expensive, the valuation does not fully reflect the pricing power and visibility of future growth and profitability, especially when the environmental and social benefits of autonomous driving are included.”
Adidas
“Adidas requires no introduction, but the global sports clothing giant is actually a key beneficiary of automation.
“Sporting goods manufacturing is very labour intensive. It takes 150-200 workers to make a sports shoe and this makes the cost of manufacturing very sensitive to production volume and labour costs.
“The industry started shifting operations to lower cost countries in the 1980s and has since chased lower wages from China to Cambodia. However, double digit increases in labour costs, high labour turnover and rising strike issues impact Adidas unsustainably in terms of cost increases and production quality. Despite Adidas’ intense efforts to vet and monitor its supply chain, there is also the additional risks around unauthorised sub-contracting to ‘sweat shops’, a constant concern for sustainable investors.
“It is therefore easy to see why Adidas would take the opportunity to automate production.  Automation is still very underpenetrated in apparel (estimated low single digits) vs high value goods such as cars and smartphones. Adidas’ new strategic plan includes new automated manufacturing plants in Germany and the USA, and new footwear fabrics and design, which could enable meaningful labour cost savings via automation that run into the hundreds of millions of euros over the next seven years.
“This would mean that Adidas is closer to the customer geographically and could offer a customised, on-demand and unique shopping experience.  If successful, this has the additional benefit of allowing Adidas to control its distribution and working capital (i.e. stop overstocking the channel and improve warehouse management), minimise product discounting, and have more stable production utilisation.
“Adidas is a mature company in the early stages of a potential turnaround. Its success is by no means guaranteed but our research suggests its automation plan could ultimately allow it to enhance its brands, with sustainable growth in cash flows following.”