This article was originally published on November 13, 2013. The ad is circulating again and generating questions from readers, so we’re re-running it for you — the ad is still largely unchanged, and the three “secret” companies are still the same. The largest, FANUY, has matched the S&P with a 9% gain since the article first ran, the others have lost value during those 11 months.
The remainder of the article has not been updated or revised since it first ran.
Yesterday we started looking at Christian DeHaemer’s robotics pitch, all from an ad for his Technology & Opportunity newsletter. And, as you might recall, I promised to follow up and look at the other two stocks he’s teasing.
The first pick that we covered yesterday, in case you missed it, was iRobot (IRBT), probably the first robotics stock any investors would mention — a mid-2000s growth darling of an IPO that has been through some big ups and downs partly because of irregular defense sales, partly because of fluctuating competition in their home robotics division (their Roomba vacuum is still the dominant home robot, but competitors have been cropping up in recent years and bringing margins down … and often getting sued for patent infringement).
You can check out that article from yesterday here, we got some good comments from readers as well … but today, we’re moving on to two other picks of DeHaemer’s.
So … what are the other two stocks?
Here are the clues for the first one:
“Robot Stock #2
“Underwater Robots Tap Ocean’s Black Gold Riches
“As you may know, an underwater robot named ‘Argo’ was responsible for discovering the wreckage of the Titanic back in 1985, at a depth of nearly 12,000 feet.
“What you may not realize, however, is that modern underwater robots offer an unprecedented profit opportunity… an opportunity that could make you rich in the months and years ahead.”
Now, in the world of robots we tend to get into some semantic disputes and arguments about the autonomy of robots …
… the Argo is a deepsea towed video camera, it didn’t “discover” the Titanic any more than Galileo’s telescope discovered the rings of Saturn but was a (unique and valuable) tool that was used by scientists and explorers to locate something, and it did help to illuminate and search a previously inaccessible part of the universe.
And likewise, the da Vinci from Intuitive Surgical (ISRG) doesn’t perform surgery, it simply translates a surgeon’s movements into a smaller plane with great precision…. etc., etc.
But moving on, which underwater robot company is he touting? Some more clues — he’s pitching the fact that deepwater oil exploration is still booming, and robots are making it more feasible to reach these offshore oil reservoirs:
“The Pressure Could Crush a Dump Truck
“According to Newsweek Magazine, temperatures exceed 450 degrees at that depth. And the 20,000 pounds of pressure per square inch is enough to crush a dump truck.
“Traditional drilling methods simply don’t work.
“Fortunately, I’ve uncovered a company that has a solution…
“In fact, they have created a fleet of underwater robots called Remotely Operated Vehicles (ROVs).
“ROVs are unoccupied, highly maneuverable, and operated by a person aboard a vessel.”
I tend not to think of something that has a driver or a pilot as a “robot,” but that’s probably just a mental hiccup of mine — there are lots of machines called “robots” that are fully controlled by humans and aren’t autonomous or even semi-autonomous in any real way, including the much-discussed flying drones that are increasingly entering civilian airspace. That doesn’t mean they’re not similar and valuable and important in lots of areas — and both drones and ROVs certainly go where manned vehicles can’t and the latter have become a big part of offshore oil exploration. There’s more than one company in this space, however, so let’s read between the lines some more:
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“One of this company’s ROV robots just set a record by working off the coast of India at a 10,385 feet water depth. That’s nearly two miles deep! Amazing.
“ROVs are literally the eyes, ears, and hands of their operators… and allow oil firms to drill through the ocean floor and tap some of the richest oil reserves on the planet….
“Make no mistake: As the big oil firms pursue operations in deep water, this company stands to make a fortune.
“In fact, the company set an annual earnings record in 2012… and in the first quarter of 2013, they increased earnings per share by a whopping 47%….
“The company is solid. In fact, in April 2013, they announced a 22% dividend increase.
“In the coming months and years, we are likely to see this company grow exponentially. Their stock has delivered over 600% gains over the last few years and is poised to do it again….”
Answer? This is a biggie, the offshore oil giant Oceaneering International (OII), which focuses on subsea systems for oil and gas exploration and production, including blowout preventers, umbilical systems, hydraulics and pump systems, etc., and they also manufacture remote underwater vehicles and own and operate a fleet of almost 300 of these underwater “explorers.” OII owns about a third of the market for these remotely operated vehicles (ROVs), and they expect the market to continue growing — there is demand for roughly three ROVs per floating rig (floating rigs are drillships and semisubmersible rigs that operate in water too deep for a jack-up rig), and rising demand for those rigs and the prevalence of increasingly complex jobs that require more subsea support means the demand is likely to rise considerably.
OII gets about 30% of its revenue from ROVs, and another 30% from other subsea products, but ROVs are their highest margin segment and they generate more than 40% of their operating income from that segment — so if ROV demand increases, that can only be good.
And it does make logical sense that it should increase — not only are there more offshore oil fields and deepwater exploration projects, but there is also an increasing focus on safety (after the Deepwater Horizon spill, particularly) and on monitoring those complex subsea systems. So the market should provide a good tailwind as long as deepwater exploration and production continue to be growth markets (which is to say, as long as oil prices don’t fall too much) … what about the specific company?
Well, OII is big — $8 billion market cap big. And it’s pretty expensive, they’ll probably earn about $3.50 per share in 2013 and are giving guidance for about $4 a share in profits next year, so at $82 a share you’re paying more than 20X expected earnings for a large company. That means they better be growing — and they are, with analysts expecting that the next five years will provide even more growth than the last five years (they’re forecasting 20%+ growth for the next five years — obviously that’s largely a guess, but it’s an informed one … they grew earnings at about 13% a year over the past five years).
And the balance sheet is exceptional, with no net debt — a little unusual for a big oil services company. They also do pay a dividend, and as teased it was raised in the Spring — they just started the dividend in 2011 and have raised it every years since initiating payouts, so that’s a good sign as well even if the current yield is quite small at 1%. There are competitors in the space, including Helix Energy Solutions (HLX), Subsea 7 (SUBC in Oslo, SUBCY or ACGYF on the pink sheets), and others who either operate ROVs or offer similarly broad subsea system engineering and development services. And pretty much all of them trade at similar valuations, roughly 20X earnings.
Don’t let the great balance sheet and the solid earnings fool you into thinking the stock is an inevitable winner, history indicates that they’re quite likely to collapse if oil prices collapse (it dropped from $40 to $10 during the last oil collapse during the financial crisis) … so if you like the stock do note that it will be oil-price-sensitive — the chart over the last seven years is, by way of example, extremely similar to Seadrill’s (SDRL), a highly leveraged deepwater driller that I own and write about fairly often. Doesn’t make them bad, but diversification in a portfolio requires paying attention to sectors that move together… this is a company that’s sort of a “robot stock” in a conceptual way, but it moves like an oil services stock.
So what’s the next one?
“Robot Stock #3
“How the “Robot Factory” Could Triple Your Money
“As I mentioned, world robot demand is surging.
“And nowhere is this demand increase more prevalent than in the industrial robot sector….
“In 2011, industrial robot sales increased 38% to 166,028 units, by far the highest level ever recorded for one year. The pace continued in 2012, with 22,598 robots sold in the United States alone. And things are just getting started…”
And then DeHaemer makes it sound extra secretive and cool …
“… there is one industrial robot company that stands head and shoulders above the rest…
“This company is the world leader in industrial robots.
“The great part is no one has ever heard of them.
“That’s because they are highly secretive. They hold their cards close to the vest….
“The company is like a futuristic city. It covers 1.5 million square meters, including 12 research and development centers. And there are robots everywhere. In fact, the company uses 2,000 robots in their own production process.
“That’s right: Robots making more robots!
“The incredible thing is because they use robots, the company runs its operations day and night. Their factories often run unsupervised for 30 days at a time.
“Says a company vice president: ‘Not only is it lights out, but we turn off the air conditioning and heat, too.'”
Can we perhaps have a few specific clues to feed to the Mighty, Mighty Thinkolator?
“… the company is sitting on $9.25 billion in cash and has ZERO debt.
“They have $6.3 billion in revenue with a whopping 25% profit margin. Pretty amazing.
“The company is so cutting edge that in 2012, Forbes added it to its list of ‘World’s Most Innovative Companies.’
“Already, their customer base reads like a who’s who of manufacturers: General Electric, Rolls Royce, Boeing, Northrop Grumman, NASA, Lockheed Martin, and Raytheon.
“Again, because of their secretive nature, Wall Street has all but ignored this company.”
Well, whaddya know — this one is the same pick that eagle-eyed (she always notices my typos, at least) Vivian Lewis posted as her robot stock in the comments yesterday (Vivian publishes a newsletter, but said this is her personal holding, not in the newsletter portfolio). I’ve never researched them before, but they are Japanese (which is probably a larger reason for the lack of Wall Street attention than is their secretive nature, though secretive they are), and they’ve been around for about 40 years and are one of the big global firms in industrial robotics, specializing in the sale of precision computer controllers for machine tools that morphed into being robots over the years, and growing with the industry into a large maker and seller of all kinds of factory floor robots — welders, pickers, etc.
Competitors in the space are giants like Siemens (SI) and ABB (ABB), neither of which is close to being a “pure play” on robots, and you can throw in some smaller players as well like the German KUKA (KU2 in Germany, KUKAF on the pink sheets) , and there are probably others I’m not aware of. There’s also the biggest US-based publicly-traded industrial robotics company, Adept Technology (ADEP), but even after more than doubling in the last couple months on better-than-expected performance from a turnaround in their business, that one is still a microcap stock with a $100 million market capitalization.
FANUC does have a factory in Japan that others have described as being like a robot-run city, there’s a nice description of it in this Bloomberg Business Week article from a few years back. That same article also explains their strong market position and their monopolistic margins — I don’t know what Vivian’s reporter told her that kept it out of the newsletter, but the numbers do look good.
The stock is largely traded in Japan, but you can trade it in the US if you’re patient — the unsponsored ADR is at pink sheets ticker FANUY where six ADR shares equals one share in Japan, and there’s also the non-ADR 1:1 pink sheet ticker FANUF — FANUY has much better volume so is probably an easier trade with better likelihood of getting a fair price when you buy (and, more importantly, when you want to sell). If you can trade in Japan, that’s where pretty much all the volume is and where the fairest price will be, the ticker there is 6954. Last prices I saw were a $26.50 close in NY and JPY 15,920 close in Japan the previous day, so that’s actually unusually close to fair for a foreign ADR (a precise currency conversion at the moment I checked would have priced it at $26.66 off the Japan close).
Interested? None of these “robot-focused” stocks are cheap based on either current earnings or analyst-predicted growth rates… but cheap isn’t the only thing to look for in a stock, and most of them are showing at least some growth and have a decent market share in an industry that could “surprise to the upside” (as the Wall Street folks like to say) if their underlying industry grows (deepwater oil, or auto and other precision manufacturing). There’s something to be said for getting on fairly early in the robotics revolution if you believe it will evolve and grow quickly as the personal computer did — but do note that it’s not necessarily easy to identify the winners or those “inflection points” when things are about to ramp up in speed … industrial robots have been evolving since the first one was put in use on a GM factory floor about 50 years ago, so whether right now is a key time in their development I don’t really know.
And yes, although every industry has its transition points and its huge winners, every industry also has many companies who were absorbed or passed by by the relentless changes in the marketplace — so even if robotics is early in its eventual development, and even if these three companies are the ones to watch right now as DeHaemer seems to think, they may well not be the names we look back on in 30 years as the great investments.
After all, how many companies competed with Microsoft, Dell and Apple and seemed, at times, to be much, much stronger and more enticing in the 1980s, 1990s or at other times during the rise of the personal computer? Wikipedia has a nice compilation, incomplete though I’m sure it is, of defunct computer hardware companies from the last few decades … some of those, I’m sure, would have been fine investments as they were acquired over the years, but others simply disappeared, it’s worth a quick reality check whenever you’re sure that the one company you’ve chosen is the harbinger of a new era.
That’s about all I can tell you about robots … I’m afraid if we get too many more household robots in the marketplace I’ll turn into a squishy (OK, squishier), couch-based life form and never move again, but DeHaemer certainly isn’t the only one predicting another wave of leaps forward in robotic development as prices come down and precision capability improves. Does that make you want to buy any of these stocks (or their competitors)? Let us know with a comment below.