Let’s set aside the current tech vs. cyclical battle gripping today’s markets and look into the future. The future of artificial intelligence and automation stock. It’s robotic surgery and automated factories. We already know it’s A.I. cars. In fact, even old-school, gas-burning carmakers like Ford realize this. With the following names, think buying of today and holding well into the future.
Based in southern Ontario, ATS custom-designs factory automation systems in the high-growth life sciences industry as well as chemicals, transportation, consumer products, electronics, food and beverage and energy. The general consensus of the prospects of global industrial automation and control systems is overwhelmingly positive, projected to rise from 2019 to 2025 at a CAGR (compound annual growth rate) of 8.6%. Automation stocks and ATS will benefit.
ATS stock boasts a robust balance sheet that leads the industry. Earnings run double its peers at $0.58 vs. $0.28, though ATS stock’s P/E is slightly higher (46.7x vs. 42.9x). Price/book stands at only 2.8x compared to the industry’s 7.9x. Meanwhile, ATS stock’s profit margin is 3.78% vs. -132.8%. ROI and ROE also blow away its peers. However, income investors are out of luck, since ATS doesn’t pay dividends.
In terms of performance, ATS stock has beaten its last four quarter handily. Automation stocks are on the rise. It reported its Q3 in early February: EBITDA almost doubled from $26.8 million to $49.7 million as orders leapt 19% year-over-year. Year-to-date, ATS has soared over 21% while the TSX has risen 8%. Year-over-year, ATS stock still beats the benchmark at 68.5% to 59%.
Momentum for automation stocks is definitely on ATS’ side and future growth looks sunny. Analyst Greg Newman recently forecast 39% growth, and the company appears to be in the sweet spot as industries continue to lower costs with automation, yet ATS isn’t tethered to the overall economy. ATS stock is overlooked by some investors, but on Bay Street the stock boasts five buys and one hold at a price target of $31.83.
I recommended this last August. As we face the reopening and eventual recovery, elective surgeries will bounce back and there will be a huge backlog to process. This backlog spells a boom for any company directly tied to surgeries. That’s short term. A longer-term tailwind for ISRG stock is the continued adoption of robotic surgery and this is where the automation stock shines bright.
ISRG stock’s centerpiece is the da Vinci Robotic Surgical System which offers more precise surgery than humans, less blood, lower risk of infection (essential during Covid), less scarring and less bleeding. Da Vinci doesn’t replace doctors, of course, but assists them in a range of operations, including hysterectomies, hernia repairs, cardiac surgery and prostate cancer.
Robotic surgeries increased from 1.8% of all operations in 2012 to 15.1% in 2018. By now, robotic surgery has become the standard in the U.S. to operate on prostate cancer, though one report last year claims that da Vinci has a “negligble effect on cancer outcomes.” The concern is valid given that each da Vinci robot costs a hefty $2 million and may be replacing more affordable treatments.
Another concern is that some hospitals, overloaded during this pandemic, will face a funding crunch which will inevitably dampen da Vinci’s sales. Also note that da Vinci relies on federal approval to be used for particular surgeries; a hospital can’t use da Vinci on just any operation it wants.
On the upside, the more procedures Washington approves, the more robotic surgery will occur and this looks likely. Also on the plus side, ISRG stock has plenty of runway to expand in Asia and Europe, while the company maintains a clean balance sheet. The automation stock is looking positive.
Since August, ISRG stock has returned to $700, though it did top $818 to begin this year. It’s been rangebound since societies returned to lockdowns. Makes sense. Therefore, it’s plausible to expect ISRG to return to its summer highs once the OR’s reopen. However, further sales of da Vinci may hit a speed bump before climbing higher this decade. Consider this a long-term buy.
Yes, Ford, is on this A.I. list, because it’s entering the EV business in a serious way and is much cheaper than industry leader, Tesla, or the Chinese EV-makers. True, Ford as well as GM, will continue to produce gas-burning cars, so if that violates your ESG standards, then don’t buy Ford (I say this as an ESG investor). Ford pledges to offer an electric-only line-up for Europe by 2030 (it didn’t sell a single EV there last year).
The first EV to roll off European production lines is slated for 2023, and after that all Ford cars will be electrics or hybrids. Ford is investing US$22 billion to pull off this transition, so this is big money, not small talk.
In the meantime, Ford’s F150 truck is its most profitable seller, and it’s tethered to single-family housing starts, which remains on fire during this pandemic. After Covid, though, the picture may look different. We’ll see.
Ford stock is no slam dunk. Its earnings, cash flow, margins and ROE lags the wider sector, and Tesla stock outperforms it year-to-date and certainly YOY. Ford stock is a bet on EV’s, but avoids the insane price swings that plague Tesla. Ford is also a bet on the future rather than the near-term. Consider this a speculative buy on dips, and don’t back up the truck.