This Under-The-Radar Robotics Play Is Backed By A Powerful Hedge Fund Guru

Michael Vodicka's picture

Tuesday, October 11, 2016 - 12:30pm

by Michael Vodicka

The S&P 500 is trapped in a nasty earnings recession. Earnings have now declined for five consecutive quarters. The last time that happened was during the financial crisis in 2009.

In the elusive quest for earnings growth, more companies are turning to a controversial strategy: replacing humans with robots to help cut costs and increase productivity.

For example, Amazon (Nasdaq: AMZN) has more than 30,000 Kiva Robots buzzing around its global network of warehouses. According to Dave Clark, Amazon's SVP of Worldwide Operations and Customer Service, the robots helped reduce operating expenses by 20%. Just five years ago, those tasks were being performed by people.

Deutsche Bank estimates that adding a fleet of robots to a new warehouse saves $22 million in fulfillment expenses.

Other S&P 500 companies are following Amazon's lead.

Drug store leader CVS Health (NYSE: CVS) has replaced cashiers with self-checkout kiosks in most of its stores.

Fast food leaders McDonalds (NYSE: MCD) and Pizza Hut are experimenting with replacing human labor with automated machinery in their restaurants.

As Amazon, CVS, McDonalds and Pizza Hut demonstrate, robots can have a huge impact on a company's profitability. Not only do they have the ability to operate 24/7, robots don't require expensive benefits such as health insurance or a 401K.

These benefits are the reason demand for industrial robots is at a record high and expected to surge in the next five years.

Market-research firm Tactica predicts that global robotics industry will grow to $226.2 billion by 2021 from $34.1 billion in 2016 -- a compound annual growth rate of 46%. Take a look at the chart below.

 


 

That would make robotics one of the fastest growing industries in the world.

This is creating a great investment opportunity.

One way to profit is with Global Robotics & Automation ETF (Nasdaq: ROBO). This ETF was launched in December of 2015 and holds a basket of 84 companies that specialize in robotics, automation and artificial intelligence.

Today, ROBO has $105 million in assets under management, average daily volume of 18,000 shares and an expense ratio of 0.95%.

Investors clearly have robot stocks on their radar. ROBO is having a great year. Shares are up 17% in 2016, more than a 200% premium to the S&P 500's 6% return.

The one weakness I see in this ETF is its dividend yield of 0.24% is more than an 80% discount to the S&P 500's 2.0% yield.

If you're looking to pump up your dividend, I've got a secretive robotics manufacturer out of Japan that fits the bill.

Fanuc Corporation (OTC: FANUY) is one of the largest manufacturers of industrial robotic equipment in the world. Its robotic systems are primarily used in manufacturing. With companies rushing to implement robotics and automation, Fanuc a direct play on the high-growth robotics industry -- though you may have never heard of it.

That's because Fanuc has a reputation for being stealthy. 

According to a report from Bloomberg, the company often conducts business by fax to keep computer viruses at bay. E-mail is mostly banned. There's no investor relations department and no conference calls with analysts.

Despite its secrecy, I expect Fanuc to outperform the S&P 500 in the next three to five years.

Dan Loeb is one of the most powerful activist investors in the world. He likes taking big positions in companies and then agitating for change. His Third Point hedge fund has more than $4 billion in capital under management.

In 2015, Loeb initiated a position in Fanuc. Since then, Loeb's powerful touch has been rewarding shareholders.

In February, Fanuc announced it was initiating the first share buyback in company history. Fanuc repurchased more than 2 million shares in the first half of the year, equivalent to 1.02% of the company's value.

Loeb has also persuaded Fanuc to increase its dividend. Fanuc has been paying a steady dividend for the last five years. Earlier this year, Fanuc announced it would increase its payout ratio jumping to 60% of operating income.

That has shares offering a dividend yield of 2.48%, more than a 900% premium to ROBO's 0.24% yield and a 25% premium to the S&P 500's 2.0% yield.

Despite the positive outlook, Fanuc's P/E ratio of 24.5 is a small premium to the industry average of 22.5 and its five-year average of 23.9.

Looking forward, I expect Fanuc to cash in on growing demand for industrial robots and Dan Loeb to continue pressuring the company to increase shareholder value with share buybacks and dividend hikes.

Risks To Consider: The yen is having a strong year as other global currencies weaken. A strong yen is bad for Fanuc because it makes its products more expensive in international markets.

Action To Take: Fanuc is a long-term buy and hold. It is becoming much friendlier to shareholders with its recent share buyback and dividend expansion. I expect shares to beat the S&P 500 in the next three to five years. In the meantime, reinvest the company's dividend payment.

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Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.