Five ways into the robotics sector

While the robotics industry looks a solid bet, it is also a young, innovative sector where new technologies are constantly emerging. So it makes sense to buy into companies with existing strong technology and large, diverse client bases, rather than 'one-product wonders' that could be left floundering in the wake of rivals as technology advances.

To get exposure to the huge growth potential in domestic robots, the least risky option is iRobot (NASDAQ: IRBT). The firm operates in both the professional and domestic service robot markets. As noted here: Cash in on the robot revolution, its Seaglider robot has been useful in the Gulf disaster. And it is using the commercial success it has already achieved with relatively simple consumer applications, such as the Roomba robot vacuum cleaner, to fund development of more innovative products.

One example is the ConnectR Virtual Visiting Robot, which allows users to move around remotely and interact with an environment via the internet. The eventual aim is to produce a robot that can act as a nurse and companion that can help elderly people live independently for as long as possible.

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The company also has a solid base in the defence sector. Its Pacbot - a small reconnaissance robot that can be carried by infantry troops - has already been sold to the US, UK and Australian militaries. At $19 a share, iRobot is on a p/e of 50, which is expected to fall to 34 in 2011. That's not cheap. But no other listed firm offers the same mixed exposure to both professional and consumer robots.

One play on defence robotics is UK-based QinetiQ (LSE: QQ). Created by the privatisation of a UK government defence technology department in 2002, QinetiQ is now the world's top supplier of military robots. Its main markets are the British and US armed forces, and fears that new administrations on both sides of the Atlantic will cut defence budgets have hit the share price. Its recent full-year results were also pretty grim. Sales were stable, but the company made a loss and the dividend was cut as it admitted it had pursued volume over profitability. However, the new management team's frank admission of the problems - over-reliance on America and Britain and poor cost controls - along with the solid underlying business, suggest that the company can be turned around (although as Tony Luckett puts it on Motley Fool, it may "have a bumpy few years"). For now, it's one to watch rather than buy.

A good play on industrial robots is Germany's Drr AG (Xetra: DUE). It specialises in kitting out car assembly and paint-spraying plants with robotic systems, and providing testing equipment for mechanical engineering. The company makes 85% of its revenue from the car industry, so 2009 was tough as car makers stopped investing. However, it has returned to profit in 2010. Orders in the first quarter 2010 were up 74% year-on-year, putting it on a p/e of 15.3 for 2011. More importantly, 61% of those orders came from China where Drr has invested in a heavy engineering presence. It has also focused on Brazil, India and Russia, and so is well placed to benefit from the projected growth in car manufacture in the Bric countries. At €17.52 it is trading below its five-year average and looks good value.

Sales of medical robots are likely to grow as health authorities around the world grant licences allowing robots to carry out more procedures. Intuitive Surgery (Nasdaq: ISRG) is the world leader in robot-assisted minimally invasive surgery. In 2004, it had 200 American clients and less than 100 internationally. By 2009 this had grown to more than 1,000 in the US and almost 400 internationally.

These numbers seem small, but 53% of its $1bn revenue in 2009 came from servicing and re-stocking installed systems. As the system gains the trust of medical professionals internationally, as it has in the US, sales will grow. Crucially, Intuitive has just received regulatory approval to sell to Japanese hospitals, opening up a lucrative market. The share price has been boosted by strong sales at the end of 2009 and positive sentiment on the healthcare market following recent US healthcare reform. The p/e of 37.8 looks pricey, but it's fast-growing and cheaper than many of its peers. Accuray (Nasdaq: ARAY), which makes robotic surgical knives, has a p/e of 51.