The Robots Are Coming
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Slowly but surely robots are moving out of the lab and making important changes in society. Monumental changes are easy to spot in retrospect, but at the moment they can be difficult to identify. As we speak, robots are revolutionizing everything from military systems, to manufacturing, to household cleaning.
Northrop Grumman (NYSE: NOC) recently released a video of its X-47B drone successfully landing on an aircraft carrier. Unmanned drones are not exactly earth shaking news. The U.S. has been using drones for years. The X-47B is revolutionary, because it is one of the first drones to complete a carrier landing only using computer systems. X-47B is a proof of concept to develop a fleet of drones that automatically follow waypoints, refuel in midair and land on aircraft carriers. Northrop Grumman aims to do all of this with more computer control and less human intervention, thus driving down costs.
America's current generation of military drones has a problem. They are expensive and need humans to babysit them. The need for multiple human operators to be constantly present increases labor costs, and makes a drone system only slightly cheaper than a comparable manned system.
The X-47B is an important tool to help Northrop Grumman provide value as the Department of Defense downsizes. The winding down of the wars in Afghanistan and Iraq has driven the company's three year revenue growth rate of -10.3%. Regardless, the United States isn't going to stop fighting wars altogether. Northrop's earnings per share (EPS) are expected to stabilize around $7.54 in 2014. With its current stock price around $90, you can buy a piece of this innovating giant at a forward price to earnings (P/E) ratio around 12.
iRobot (NASDAQ: IRBT) is more than a collection of stories by Isaac Asimov. iRobot the company produces a number of robots for civilian and military uses. Its most famous product is the vacuuming Roomba robot. According to the company's estimates, it has been able to capture 10% of the vacuuming market in North America. By expanding into wet floor care and the outdoor cleaning market, it is pushing robots further into everyday life, and increasing its addressable market from $7 billion to $14 billion.
iRobot has been consistently profitable. It has managed to develop a wide portfolio of robots for security and households without driving itself into debt. Its balance sheet is clean with a quick ratio of 3.1. The downside is that the company is trading at a P/E ratio around 45. Compared to other giants like Whirlpool, iRobot is a small company fighting in a very competitive consumer durables market. It is a great robotics company to watch, but at such valuations it is risky.
3D Systems (NYSE: DDD) is revolutionizing manufacturing and prototyping with its wide range of 3D printers. For small production runs and objects produced with expensive materials, 3D printers can offer substantial cost savings. Instead of taking a large amount of material and removing atoms until the desired form has been created, 3D printers use additive manufacturing build and an object piece by piece.
The company is looking to become an integral part of the entire design process, from prototyping to production. It recently introduced a new injection model-like material that is stronger and offers more testing possibilities.
Like iRobot, 3D Systems' valuation appears quite high at its current P/E ratio around 70. Overall, the additive manufacturing market is expected to increase from $2.2 billion in 2012 to $10.8 billion in 2021. If 3D Systems can grow its 2012 EPS of $0.72 along with the broad additive manufacturing market, then it is trading at a forward 2021 P/E ratio around 14. Its balance sheet is clean with a total debt to equity ratio of just 0.1. For long-term investors willing to invest in the company for eight years, it may be an attractive investment.
Robots are quietly revolutionizing many areas of human society. Northrop Grumman is paving the way for the U.S. military with its cost saving X-47B unmanned drone. 3D Systems is working with manufacturers to increase their agility and options through new 3D printers. iRobot is working with consumers to bring robots into the household through its cleaning products. Northrop Grumman is more of a value play, while 3D Systems requires a holding period of many years to justify its current valuation. Given the strong incumbents in the consumer durables market, it is hard to recommend iRobot at its current valuation.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and iRobot . The Motley Fool owns shares of 3D Systems and Northrop Grumman and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!