One of the classic value investment strategies favored by Warren Buffett is to invest in the companies that make the technology that that other companies rely upon. This includes machine tool makers and companies that make metal components.
Recently I stumbled across some articles about a startup called Zume Pizza; which hopes to revolutionize the restaurant industry by using robots to make pizza. That’s an interesting idea; but it is of little use to most of us, because Zume is a privately held company. Rich people like Ashton Kutcher can invest in it, but not ordinary folk like you and I.
Then I noticed something interesting; there is a way that you can invest in companies like Zume. You cannot buy stock in Zume, but you can buy shares of the company that makes the robots Zume uses; the Swiss-based ABB Group (NYSE: ABB).
ABB is one of the world’s leading manufacturers of industrial robots; the company has installed over 250,000 of them worldwide. They come in all shapes and sizes and do all sorts of jobs. The future market for those robots is vast; robots are expected to replace five million jobs around the world by 2020, the World Economic Forum predicted.
Why Robots will take over the Kitchen
Most of those robots look nothing like the Transformers. Instead they’re mechanical arms; that perform mundane tasks like painting cars or placing pizza into an oven. That’s what Zume uses them for to put pizzas into the oven, and take them out.
That does not sound very sexy until you realize that there are around 71,856 pizza restaurants in the United States alone according to Statista. Zume paid between $25,000 and $35,000 for each of its robots, according to CNBC. If just under 10% (7,100) of those pizza joints paid $35,000 each for one robot, it would add up to $248.5 million.
Now just imagine what happens if other kinds of restaurants such as sandwich shops or burger joints start using robots to do some of their work. One brand; McDonald’s (NYSE: MCD), operated 14,248 restaurants in the United States and 1,443 restaurants in Canada in 2015, according to Statista.
Beyond fast-food joints there are supermarkets; such as Kroger (NYSE: KR) and Whole Foods Market (NASDAQ: WFM), many of which are adding cafes and pizzerias. Kroger alone operates 2,781 supermarkets in the United States.
Supermarkets are adding precooked meals because sales for groceries are falling. The amount of food Americans spent on eating out actually exceeded that spent on groceries for the first time in 2015.
Americans spent slightly more at restaurants and bars than at grocery stores; for the time, an analysis of U.S. Commerce Department data by Bloomberg determined. Persons between 25 and 34 spent around 6% of their income on food away from home and 5% on groceries.
The same data showed that Millennials; those under 35, preferred fast food, deli food and pizza to traditional restaurants. That means there is a growing market for such foods, which should create a larger market for ABB’s food-preparing robots.
With a labor shortage a growing problem in the restaurant industry; and the $15 minimum wage almost a certainty in much of the U.S., there’s a lot of incentive for restaurants to automate. The market for restaurant robotics is there, and ABB is certainly in a good position to fill it.
How Pizza Could Make Robots a Value Investment?
ABB is developing state of the art robot such as YuMi which can applied to the kind of functions done in a pizzeria. Unlike older industrial robots, YuMi is a two-armed construct that can safely interact with humans. It does not have to be locked in a cage like older industrial robots; so it can be safely used in environments such as restaurant kitchens.
Zume has proved that robots can safely make pizza. Its robot-human team has made over 10,000 of them; in the five months between April and September of 2016, CNBC reported. The concept of robots in the kitchen; or the food processing plant; has been proven.
Value investors need to take notice: there is a potentially vast market for kitchen robots and ABB is well-positioned to take advantage of it. Yet they also ask a more important question is ABB making money?
Is ABB Making Money?
The answer to that question is yes, ABB is making money. More importantly the financial data I found on Ycharts indicate that it has most of the characteristics of a classic value investment.
On June 30, 2016, ABB reported the following financial numbers which provide a lot of food for thought:
- $34.34 billion in revenues.
- $1.687 billion in in net income.
- A profit margin of 4.68%
- A free cash flow of $904 million.
- Assets of $42 billion.
- Cash and short-term investments of $6.357 billion.
- $4.5 billion in cash from operations.
The numbers are a mixed bag; I really liked all the cash which indicates a lot of float. What I did not like was the revenues; which have taken a big drop over the last two years.
ABB reported $41.57 billion in revenues in June 2014, that fell to $39.83 billion in December 2014, $37.89 billion in June 2015, $35.48 billion in June 2015 and $34.34 billion in June 2016. Strangely enough this drop proves that ABB is really a good company because managed to keep $6.357 billion in the bank despite a revenue drop of $7.23 billion.
The best companies are those that can suffer massive revenue losses yet still retain a lot of cash. ABB certainly fits into that category, which makes it a good value investment.
ABB is a Good Income Investment
Beyond the cash, ABB is a good income investment because it gave investors a dividend yield of 3.33% on September 30, 2016, and a return on equity of 11.83% on June 30, 2016. Since it was cheap; trading at $22.51 a share on September 30, 2016 it is possible to accumulate quite a few shares of ABB.
ABB shareholders received a very nice dividend of 75.1¢ on July 8, 2016; despite the revenue falloff at the company. More importantly that dividend grew dramatically over the course of a year. Rising from 17.6¢ on July 24, 2015 to 75.1¢ a year later. Stockholders saw their dividend grow by 57.5¢ in just one year.
There’s another reason why I like ABB; diversification. Owning it is a great way to invest in Europe without being too exposed to the European market. Another advantage is that ABB is traded on the New York Stock Exchange; which means Americans can get accurate real time information about it.
Beyond that the company itself is highly diversified its technologies can be used in a wide variety of industries including:
- Oil and gas
- Power distribution
- Power generation
- Power transmission
- Process automation
- Pulp & paper
- Solar power
- Wind power
- Food & beverage
- Data centers
- Panel Building
How ABB will Cash in on Electric Cars
Other products it builds include micro-grids, power transmission networks, control systems, electric vehicle charging infrastructure, electric substations, and more. That means ABB is well positioned to take advantage of other next generation technologies such as electric cars. One electric carmaker Tesla has plans to install 1,200 superchargers; electric car charging stations in the United States, and to manufacture up to one million electric vehicles a year.
Instead of spending $204.03 a share on Tesla Motors (NASDAQ: TSLA); which paid dividend on September 30, 2016, you could have bought nearly 10 shares of ABB. Since ABB can provide robots for Tesla’s factories and infrastructure to power its vehicles, it profits whether or not Elon Musk’s venture thrives or loses money.
As you can see robotics is only part of what ABB does, so you will not be overexposed to potentially risky next-generation technologies. Yet you will be in a position to profit from them.
Most importantly, as its work with Zume indicates; ABB is willing to work with new businesses. That means the company is well positioned to enter new fields as well as take advantage of existing sectors.
If you are looking for a value investment in the new economy, ABB might be it. It is well positioned to take advantage of both the robotic revolution and electric cars.