Global Automation: What to buy and when to buy in an upcycle

Investing.com -- With industry indicators and corporate results improving steadily, Bernstein sees the global factory automation (FA) upcycle entering consensus territory. However, FA stocks have yet to reflect this recovery, underperforming year-to-date despite the turn in macro data.

In their Monday report, Bernstein analysts address two central investor concerns: when to buy into the cycle, and which stocks to own during it.

Historically, the timing of automation stock price peaks aligned closely with industry indicators. But Bernstein notes that pattern has unraveled in recent cycles.

“In this chaotic world, our recommendation is simply not to time the entry,” analysts led by Jay Huang said in the note. Instead, they argue for a focus on valuations, which remain below historical averages, even after adjusting for the stage of the cycle.

Among automation stocks, Bernstein recommends Keyence (TYO:6861) (OTC:KYCCF) as the top pick for the upcycle. “If you only buy one stock in FA now, go with Keyence,” they advise, pointing to its ability to generate strong revenue growth similar to more cyclical peers in upturns while remaining more resilient during downturns.

Although Keyence tends to show less profit growth in recoveries due to stable margins, its share price performance over time has been more consistent. Since 2011, Keyence has delivered the highest median 12-month return with the lowest volatility across the FA group.

For those looking beyond Keyence, Bernstein also sees upside for Harmonic (NASDAQ:HLIT) Drive Systems Inc (TYO:6324), SMC Corp (TYO:6273), and Fanuc Corp. (TYO:6954) based on current EV/EBITDA multiples and forward estimates.

Harmonic Drive shows the highest multiple expansion potential at 112%, followed by SMC at 77% and FANUC at 40%.

Bernstein raised its price target for SMC to ¥76,000 from ¥74,000, citing stronger FY3/2027 revenue driven by pent-up demand and better margins.

“The improved margins are attributed to better operating leverage. We lowered our target multiple to reflect softened market sentiment on this name,” the analysts continued.

“The business is in an overall upcycle, and we continue to see substantial price upside by the cycle peak in 2026,” they added.

Bernstein maintains Outperform ratings on Keyence, SMC, FANUC, Cognex (NASDAQ:CGNX), and Harmonic Drive. While volatility around timing persists, analysts believe the ongoing upcycle offers favorable entry points, with valuations poised to improve as the cycle progresses.