Barron's - USA (2020-10-12)

(Antfer) #1

22 BARRON’S October 12, 2020


conjecture to think industrials will


trounce technology in the next de-


cade,” Fundstrat’s Tom Lee writes.


The benefits of technology have al-


ready started to bolster some industrial


companies, particularly those engaged


in automating the industrial process.


Spending on automation should con-


tinue to accelerate over the next decade,


says Baird industrial analyst Rick East-


man. He estimates that spending in


recent years has tracked global gross-


domestic-product growth, but that the


combination of tech trends and a return


of manufacturing capacity to the U.S.


should lift that growth rate by one to


two percentage points a year. That may


not seem like a lot, but compounded


over a decade, it is a huge opportunity.


Automation also means more


chances to collect and process data—


and charge for it, too. The decreasing


costs of computing combined with the


explosion of cloud-based technology


makes it possible to collect data, store


it, and analyze it to improve processes.


“Edge computing,” which involves


analyzing the processes away from the


center of activity at a manufacturing


plant, is becoming a big business for


industrial companies, providing them


with recurring revenue similar to


Microsoft’s model.


Rockwell Automation, which con-


trols processes at the “edge,” has been


growing sales and earnings at about 5%


and 18% a year, respectively, for the


past 10 years. That compares with sales


growth of 5% and annual earnings


growth of less than 8% for industrial


companies on average. Rockwell’s


profit margins have averaged about


19% in recent years, up from about 7%


at the time of its split from Rockwell


International in 2001.


Companies are betting the growth


will continue by buying software com-


panies to leverage the explosion in


computing power and the falling cost


of data storage and analysis. Siemens


(SIE.Germany), for instance, bought


Mentor Graphics in 2017 for $4 bil-


lion, while Rockwell Automation this


past week announced a partnership


with Microsoft, marrying more soft-


ware applications with its industry


expertise. Those efforts should lead to


more profits and better margins. “By


2030, you are going to shift how you


create customer value,” explains Wil-


liam Blair analyst Nicholas Heymann.


“You don’t want to be on the wrong


side of the information divide.”


While the trend toward automation


and data will create new revenue


streams and higher profit margins,


industrial companies also need new


business, especially to replace lost


revenue from the decline of fossil


fuels. That business could come from


the rise of renewable energy.


Make no mistake: Servicing oil


companies was a huge business for


industrial companies, but as oil


prices have dropped, so have those


sales.


Enter renewable energy. The cost


of generating electricity from solar


and onshore wind is now just about as


cost effective as natural-gas-based


power generation. Global spending on


renewable power totaled $313 billion


in 2016, according to the International


Energy Agency. Combined with the


amount spent on energy storage and


transmission, the figure rises to $


billion. Upstream oil-and-gas explora-


tion spending in 2016 was $452 bil-


lion, down from $614 billion in 2015.


The tipping point arrived.


It has created an enormous opportu-


nity for industrial companies building


and servicing the renewable infrastruc-


ture. There is no marginal cost for wind


and sunlight, but a majority-renewable


grid requires more technology and


storage to manage electricity generated


from, say, Vestas Wind Systems


(VWS.Denmark) turbines turning in


the North Sea or a giant NextEra En-


ergy (NEE) solar installation soaking


up the rays in Nevada. U.S. transmis-


sion investment is expected to top $


billion a year for the next few years, up


from about $10 billion a year a decade


ago, according to the Edison Electric


Institute.


“It’s clear that electrical power sys-


tems are changing dramatically both


for utilities and for their customers,


driven by decarbonization and the


decentralization of power generation,”


Uday Yadav, president of the electrical


sector at Eaton, tells Barron’s. “There


is a need for additional electrical


equipment as well as software and


services to optimally manage the ex-


panded grid in terms of safety, resil-


ience, and economics.”


And the push for renewable energy


cuts across all businesses. Gordon


Haskett analyst John Inch looked at


more than 35 companies that generate


more than $3.3 trillion in annual sales


combined. Those companies are try-


“It is


probably a


worthwhile


conjecture


to think


industrials


will


trounce


technology


in the next


decade.”


Tom Lee, Fundstrat


A Vestas turbine at


the Macho Springs


wind farm, owned


by Capital Power


and operated by


EDF Renewables.


ing to reduce emissions and are ask-


ing their suppliers to do the same.


“The train has left the station,” Inch


says. “Now it is a function of how fast


that train runs.”


Here are five stocks poised to pros-


per on the trends of electrification,


automation, and data:


Schneider Electric


Some companies benefit from all


three: Take Schneider Electric (SU-


.France), a $71 billion maker of elec-


trical and automation products based


just outside of Paris. The company,


like many of its peers, has been push-


ing into software to enhance sales


growth and expand profit margins.


In 2018, the company acquired a 60%


stake in engineering software firm


Aveva Group (AVV.UK).


Schneider’s automation business


generates more than $7 billion in an-


nual sales, but electrification is


larger—generating about $24 billion


in annual revenue from the sale of


products ranging from residential


circuit breakers to low-voltage trans-


formers to power inverters, which


turn direct current from solar genera- Photograph by Justin Hamel

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