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