The reshoring trend is bringing manufacturing back into the U.S., putting the need for robots and automation at the forefront of the building boom. Pandemic-era supply chain constraints as well as rising offshore wages and transportation costs have contributed to the shift. Geopolitical risk factors also are at play. A recent research note from UBS found that corporate U.S. reshoring announcements jumped 17% between the third- and fourth-quarter last year, and are up nearly 300% since the final quarter of 2019. But with a tight labor market, companies are incorporating more automation and robotics into these brand new factories. Although manufacturing job openings have been contracting on a month-to-month basis, openings this past April were still almost 61% higher than in February 2020 , the last “normalized” period before the pandemic struck. “Labor availability — it’s already an issue [and] it’s going to continue to be an issue,” said Jonathan Sakraida, an analyst at CFRA. “So the viable [way] for manufacturers to address this is through automation. So there is the impetus here for that investment going forward.” “Automation will be an important part of the opportunity set,” he continued. “We believe that we will see a further adoption of automation as a result of cost pressures, and there are some interesting opportunities there.” Although reshoring will likely lead to higher initial costs as companies build and invest in new manufacturing facilities and equipment, it also allows them to “de-risk” their production processes. Other potential benefits include lower shipping costs and lower raw materials and finished goods inventory costs as companies gain better insight into matching production with demand levels and avoiding backlogs or oversupply. This “pendulum shift” to domestic production is likely to stay “in place,” according to Carol Schleif, chief investment officer at BMO Family Office. Memories of N-95 mask shortages, electric vehicle battery shortfalls and shipping vessel backlogs are still fresh, she said. The U.S. government also has offered “substantial aid” over the last few years in order to bolster domestic manufacturing in industries it deems critical to national security, she added. UBS noted that compounding the U.S. reshoring momentum is the fact that the domestic economy has been under-invested by an estimated $5 trillion over the last two decades. Demand for robotics The CHIPS Act and the Inflation Reduction Act “very intentionally” included measures to help the U.S. reemerge as a key robotics industry player, according to BMO’s Schleif. She said that robotics will help industries create a smaller manufacturing footprint and less labor-intensive facilities. Evercore ISI’s recent note following the Automate 2023 show said that focus in the industry is on unified standards. Analyst Amit Daryanani said that he expects tailwinds for automation demand in the industrial manufacturing space will continue to strengthen. He noted that within the robotics industry, customers are seeking flexible, scalable consumption models, which has led to a rise in robotics-as-a-service offerings. Printer producer HP is benefiting from the trend, according to Daryanani, who explained that the company can optimize the production process of low-volume, high-value parts with its vast offering of 3D printers, materials, software and post-processing equipment. Its metal parts-as-a-service offering can alleviate upfront investment costs for customers while increasing its products’ exposure, he said. AZTA YTD mountain Azenta shares are down about 20% year to date. Another robotics company Daryanani picked was Azenta . The precision robotic company aids chipmakers, one of the industries many analysts expect will increasingly shift to automation in its production process. To be sure, three out of five analysts covering the stock give it a hold rating, according to Refinitiv data. Shares have tumbled 20.4% year to date and more than 32% over the last 12 months. Automation plays Chipmakers are indeed a key part of the trend. The CHIPS and Science Act passed in 2022 provides funding and tax credits to encourage investment in manufacturing chips domestically. The Inflation Reduction Act has also helped spur manufacturing clean energy products and electric vehicle batteries. Morgan Stanley named industrials as one of the sectors most exposed to disruption as manufacturing shifts to reshoring and de-risking. It estimates that the U.S. automation sector can grow 65% from $20 billion in 2023 to $33 billion through 2030. Going forward, “semiconductors, medical devices and pharmaceutical manufacturing and domestic infrastructure are all likely to be winners in the reshoring boom,” according to Jonathan Coleman, portfolio manager at Janus Henderson Investors. CFRA’s Sakraida highlighted industrials with automation exposure as one of the sectors best-positioned for reshoring benefits. Construction spending in April was more than double its levels from 12 months ago, which he attributed to reshoring. When examining the upside potential of companies in this sector, Sakraida said he looks at acquisitions and automation equipment development. Industrial machinery company Lincoln Electric is one of the companies already seeing near-term benefits from reshoring and a rise in manufacturing construction spending, said Sakraida. He noted that approximately a quarter of the company’s sales come from its automation solutions business. Despite potential concerns that Lincoln Electric may be facing a slowdown if pent-up demand from the pandemic eases, he said that the company — and automation companies broadly — are well-cushioned from macro headwinds thanks to the reshoring trend pushing backlogs into record territory. Rockwell Automation is another capital equipment supplier Sakraida highlighted. Shares reached a 52-week high on Friday, pushing its year-to-date gain above 24%. With the stock already trading more than 8% above its average price target, some may say it’s due for a potential drawback. ROK YTD mountain The stock is trading near its 52-week high. However, UBS analyst Chris Snyder has a buy rating on shares. He said that Rockwell is set to exceed its management’s order targets this year thanks to its backlog. Morgan Stanley also picked Rockwell as “the best play on the U.S. reshoring theme” with an overweight rating. The scale of manufacturing investments in the U.S., particularly in new semiconductor projects, new energy vehicles and batteries makes it one of the best companies in the world to capitalize on the trend, according to its analysis on global manufacturing and industrial automation. Emerson Electric ‘s stock has not been performing as strongly as its peer Rockwell. While shares are down more than 8% in 2023, the stock is still in the green by 8.6% over the past 12 months. EMR YTD mountain Emerson shares are down year to date. More than 70% of analysts covering the stock rate it either a buy or a strong buy, per Refinitiv. Sakraida said it could see upside as it gradually exposes itself more to the reshoring trend. He noted that 72% of its sales are derived from automation. “Currently, this company is in a bit of a transformational period. It’s working toward becoming a pure-play automation company,” Sakraida said. —CNBC’s Michael Bloom contributed to this report.
This story originally appeared on CNBC
