PRODUCERS TO BENEFIT FROM TAX CUT

Firms expected to use tax savings on automation that will allow them to cut future labour costs

THE Trump administration’s plan to cut corporate taxes may add more fuel to the already hot rally in the shares of automation companies.

Fund managers from Columbia Threadneedle Investments, Hodges Capital and Hood Capital say that they expect that companies will use part of their tax savings to invest in high-cost machines that will allow them to reduce labour costs over time.

That would be a boon for companies such as Cognex Corp, which makes so-called machine vision systems that are used to quickly sort and fill orders in e-commerce warehouses, and Faro Technologies Inc, which makes three-dimensional measuring tools that can help lower labour costs on aerospace assembly lines.

Cognex shares touched a 52week high on Friday, while Faro shares at US$38.20 (RM162.04) were closing in on their year-high of US$40.60 reached in August.

Automation companies have rallied overall this year as corporate America looks for ways to maintain margins and productivity at a time when wages are rising and unemployment is low.

The US$1.4 billion Robo Global Robotics and Automation Index ETF, which includes a mix of large-cap companies such as Rockwell Automation and Intuitive Surgical, is up over 35 per cent for the year to date, nearly triple the 13.5 per cent gain in the broad S&P 500 index.

Numerous fund holdings are up over 90 per cent for the year to date, including drone manufacturer AeroVironment Inc, gear manufacturer Harmonic Drive Systems Inc, and laser company IPG Photonics Corp.

Large-cap automation companies, such as Rockwell Automation Inc and Emerson Electric Co, have also posted solid returns so far this year, though smaller-cap companies have seen larger share price gains overall.

The Robo ETF has posted positive inflows every week since President Donald Trump’s November election, partly due to investor anticipation of a corporate tax cut. Investors have sent US$461 million into the fund since early August, when the Trump administration began publicly discussing its plans to cut the top corporate tax rates to 20 per cent, from 35 per cent previously.

Prominent US senators such as Bob Corker and Rand Paul have criticised the Trump administration’s plan for its potential to increase the federal deficit, leaving its passage far from certain. Yet fund managers say that they see gains in automation companies continuing regardless of whether a tax bill passes.

Middleby Corp, which made smart ovens and other kitchen equipment used in restaurant chains such as Panera Bread, would likely benefit as companies look for ways to reduce labour costs as more states raised the minimum wage, said Eric Marshall, a portfolio manager.

Shares of Middleby are flat for the year, in part due to slow sales of its Viking line of high-end ovens after the company had to recall some freestanding gas ranges that turned on by themselves with customers unable to turn them off.

Hodges said that despite the overhang, the firm looks poised to continue to grow as restaurants expand and high real-estate prices prompt more homeowners to upgrade their kitchens.

“This is a firm that’s got some real secular trends going for it, and a corporate tax cut will only accelerate those trends,” he said. Reuters