Industrials: Labor Shortages Driving Innovation

• Prices in our industrials sector remain slightly overvalued on average, with a mean market-cap-weighted price/fair value estimate of 1.04, with a few notable values outlined below.
• Interest in industrial automation and autonomous vehicles continued to accelerate during the quarter, as CEOs are faced with tight labor markets and stressed supply chains. Extending solutions beyond repetitive tasks on the factory floor, research and investment has ventured into increasingly complex territory such as autonomous agricultural and mining equipment.
• The Internet of Things, or IoT, is gaining penetration in the industrials sector for its own productivity goals, increasing the prospects of margin expansion. As early adopters of this technology, industrials stand to disproportionately benefit.
• Compelling automation and autonomous vehicle technologies are likely to foster new company formation and M&A. A raft of startups is gaining visibility with large corporations and venture investors alike.

With an unemployment rate of 3.9%, U.S.-based companies are forced to seek new pathways to enhance labor productivity. In the trucking sector, the problem is particularly acute, given a shortage of over 50,000 truckers, while the average age of existing truckers is 55. Likewise, 39% of  Boeing (BA) technicians are aged 50 and up. During a recent meeting with management, Boeing touted the benefits of automation, which include higher quality (improvements of 50%), improved throughput (2 times faster on 737 wings), and decreased manual labor (80% manual on wings to 80% automation). Similarly,  FedEx (FDX) recently discussed the limited deployment of fully autonomous forklifts in its highly automated sortation hubs.