Reading Too Different For Comfort by Louis-Vincent Gave I came across an interesting paragraph making sense of what type of jobs are most vulnerable to robotization:
• Category 1 workers: non-repetitive, non-complex: Gardeners, plumbers, ski instructors, hair-dressers… These jobs are not in danger and will likely continue to be the largest source of job growth across the OECD and emerging markets.
• Category 2 workers: non-repetitive, complex: Pharmaceutical research, software coding, civil or mechanical engineering, hedge fund managers... Such jobs are not in danger. Quite the contrary - demand will likely increase and salaries rise, allowing those working in these fields to purchase more goods and services from the workers toiling in categories 1, 3 and 4.
• Category 3 workers: repetitive and complex: Airline pilots, surgeons, highly qualified industrial jobs, equity traders…Within the OECD, these are the jobs threatened by the Robolution.
• Category 4 workers: repetitive, very simple: Manufacturing jobs, low-end farming jobs etc… Think Charlie Chaplin in the movie Modern Times. Such jobs have already disappeared in the OECD - they will now disappear in emerging markets.
For clarity, I put Mr. Gave's thinking into a graphical model:
Cat 1: Gardeners, plumbers, ski instructors, hair dressers
Cat 2: Pharmaceutical research, software coding, civil or mechanical engineering, hedge fund managers
Cat 4: Manufacturing, low end farming jobs,
Cat 3: Airline pilots, surgeons, highly qualified industrial jobs, equity traders
If you are young or you have kids, it is already a revolutionary idea they may not be best off going through University to end up with a Cat 3 job. It may actually be much better to go for a Cat 1 job while they save a lot of money on student loans.
Super-interesting… but how does this apply to investing in Robotics stock?
There is a quote out there somewhere by a VC or a successful serial entrepreneur. I don't know which one and I can't remember the quote very well because an hour of Google searches didn't turn it up. The question is what he looks for starting a business. He answers something like:
I look for industries with a lot of jobs and see if I can kill them
If you know the exact quote and/or who said it please help me out in the comments.
It's a brutal way to go about your daily business but I guess he found it a reliable model to come up with good investments/business plans. We can borrow this train of thought and couple it with the LVG model to get to an interesting investment set.
Look for firms with an abundance of category 3 and 4 employees. These firms are positioned well to expand their margins the most when robots become cheaper and improve. In terms of profiting from the robo revolution, ideal investment candidates would have at least several of the following characteristics:
- Subject to a high degree of labour protection regulation
- Low Enterprise Value/Employee count
- Highly robust
- Employees are not an intrinsic part of the product
Subject to massive labour protection regulation
It seems counterintuitive to look for candidates in countries with massive labour protection regulation. Admittedly, management will switch to robotization last because the initial savings will be the least. However, a pool of labour that is highly protected is likely to be very inefficient to begin with. In addition, robotization may well be one of these trends where there's a last mover advantage. The first few firms to invest are buying very expensive robots that over time are still worth it. Initially, that puts pressure on the remaining firms who haven't robotized but when these switch to robotization a few years later, and achieve greater productivity gains at lower CapEx, the tables are turned.
Low Enterprise Value/Labour cost
You'll want to have an investment candidate that is spending a lot on employee salaries to generate its revenues. An investment based on robotization will have a higher RoI; the higher labour costs are compared to Enterprise Value. On a more detailed level, there will be lots of caveats but on a high level it should hold up. This is a very important attribute, perhaps the most important after the next two.
Highly robust firms
Robots are getting better, that's obvious. How good do they get? How cheap do they get? How fast will their use spread? are all questions that are still open. It will be fairly easy to make the right observation but in the end, still fail to profit because the firm you are counting on got disrupted itself. One principal that will help you to profit from future cash flows is to bet on firms that are very hard to kill. As Howard Marks says:
To finish first you must first finish.
Employees are not an intrinsic part of the product
You aren't going to do very well implementing a model to profit of robotization if you pick a firm where it just won't work. Somewhat of a weird example (and not legal in all geographies) is that of an escort organisation. Employee costs eat up a lot of cash flow. The services are non-complex and repetitive. Yet, I'm skeptical of robotization.
Firms that could benefit from robotization
By no means an exhaustive list here are eight names that have the potential to benefit from robots evolving:
G4S Plc ADR
G4S Plc ADR (OTCPK:GFSZY) offers security services. It operates on six continents and employs 623,000 people. I'm fairly sure not all of these men and women are about to lose their jobs but many of the roles fulfilled within this company seem fairly susceptible to automation or robotization. It won't come as a surprise. One man or women can already survey many locations at once through technological advancement. The company could score better on robustness with EBITDA at only 3.2 x net debt. However, the firm is taking it to 2.5x, which is much better. Demand for security seems fairly resilient although the medium through which is delivered is always changing.
Securitas A B (OTC:SCTBY) does many of the same things as G4S. It employs 330,000 people in 53 countries. It's a little bit safer compared to G4S. However, G4S scores better on the important Enterprise Value/Employee metric.
Casino Guichard Perrachon SA ADR
Casino Guichard Perrachon SA ADR (OTCPK:CGUSY) A large grocery store operator with 325,820 employees. As a kid, I've stacked shelves and I'm fairly certain it's a task that can and will be robotized. However, not all employees will disappear because of robotization. When I reviewed Ahold (OTCQX:ADRNY) a while back I was really impressed with the self-checkout counters:
Source: as apparent from the terrible picture quality, the picture is author's own
If the customers can do the work themselves, there is no need to invest in robots. Even better.
Back to Casino, the firm doesn't score very well on robustness as its debt is quite high. However, given the ambitious plan to cut down on debt:
Source: company presentation
and the resilient nature of demand for its products, I've included it anyway. Casino isn't your only choice. Many retailers could be interesting candidates.
ISS A/S ADR
ISS A/S ADR (OTCPK:ISSDY) A facility services company that could be interesting. It offers many of the same services as the securities companies discussed earlier but also cleaning and catering services. Both services that are ripe for robotization.
Compass Group Plc ADR
Compass Group (OTCPK:CMPGY) operates a lot of restaurants, employing 500,000 people worldwide. The majority of jobs in restaurants from busboy to server to chef are not immune to robotization. The company is also focused on efficiency in labour costs as apparent from this slide in its investor presentation:
Management also identified automation as a source of labour cost efficiency gains but not robotization.
Why I wrote this up while I'm skeptical of prediction
There's nothing preventing investors of applying a fundamental analysis methodology to a set of companies with these characteristics. If the investment makes a lot of sense based on a subsequent fundamental analysis, the potential optionality derived from robotization through the industry comes free, as opposed to when you buy companies that are focused on robotics and where future prospects are priced in.
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