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

Bernstein identifies a consensus-forming global factory automation (FA) upcycle, noting FA stocks have yet to reflect this recovery despite improving macro data and attractive valuations below historical averages. The firm advises investors to focus on current valuations rather than timing entry, naming Keyence (TYO:6861) as its top pick due to its consistent performance and resilience across cycles. Bernstein also sees upside in Harmonic Drive, SMC Corp, and Fanuc Corp., maintaining Outperform ratings on these and other FA names, anticipating substantial price upside by the cycle's projected peak in 2026.

Analysis

Bernstein analysis indicates a significant disconnect in the global factory automation (FA) sector, where improving industry indicators and corporate results are signaling a consensus upcycle, yet FA stocks have underperformed year-to-date. The firm explicitly advises against timing market entry, citing the breakdown of historical patterns, and instead directs focus towards valuations which remain below historical averages. Keyence (TYO:6861) is highlighted as the top pick, distinguished by its ability to generate strong revenue growth in upturns while maintaining resilience in downturns, a profile that has delivered the highest median 12-month return with the lowest volatility among peers since 2011. Beyond Keyence, Bernstein sees substantial upside in other names, maintaining Outperform ratings on Harmonic Drive Systems (TYO:6324), SMC Corp (TYO:6273), and Fanuc Corp (TYO:6954). This is quantified by projected EV/EBITDA multiple expansion potential, with Harmonic Drive leading at 112%, followed by SMC at 77% and FANUC at 40%. For SMC Corp specifically, Bernstein raised its price target to ¥76,000, forecasting stronger FY3/2027 revenue and improved margins from operating leverage, though it also lowered the target multiple to account for softened market sentiment. The overall outlook is bullish, with Bernstein anticipating the current upcycle to peak in 2026, suggesting a multi-year window for potential price appreciation.

Key Decisions for Investors

• Investors should consider the current underperformance of factory automation stocks as a favorable entry point, focusing on attractive valuations rather than attempting to time the cycle bottom.
• For a core position with a defensive growth profile, Keyence (TYO:6861) is the recommended holding due to its proven track record of lower volatility and consistent returns across cycles.
• For higher-beta exposure, consider positions in Harmonic Drive Systems, SMC Corp, and Fanuc Corp, which offer significant multiple expansion potential as the upcycle progresses towards its projected 2026 peak.
• Monitor market sentiment surrounding names like SMC Corp, as softer sentiment could present a near-term headwind or a more attractive entry price despite a strong long-term fundamental outlook.