24 BARRON’S October 12, 2020
tion into alternating current used
by modern electrical equipment.
“We’re not in the business of build-
ing solar arrays, but we are in the
business of managing that power,”
says Mark Feasel, vice president of
Schneider Smart Grid. One of his jobs
is to help commercial customersman-
age power demands from a diverse
source of renewable and traditional
electricity-generation technologies.
Schneider’s sales have grown less
than 2% a year on average for the past
five years, but growth is expected to
accelerate to about 5.3% a year on aver-
age for the next three years. At 21times
estimated 2021 earnings of roughly $6
a share, Schneider, which traded at a
recent 107.45 euros ($127), isn’t all that
cheap. Indeed, the multiple is higher
than its historical average of about 15
times. But the outlook for both automa-
tion and electrification is improving.
Schneider’s stock can trade like
other high quality industrials—at
about 25 times earnings—and hit€125
over the coming months.
Eaton
Eaton, like Schneider, makes circuit
breakers and transformers. It also
benefits from the rise of electrification
and automation. Eaton’s sales have
fallen about 1% a year for the past five
years because, well, it is an industrial
in the midst of recession and sells
equipment for heavy-duty machinery.
But, as with Schneider, Wall Street
believes that Eaton’s sales growth will
accelerate, to about 3.7% a year for the
next three years. The growth accelera-
tion will be driven by electrification
spending. Haskett’s Inch thinks that
growth in its electrical divisions can
reach 4% to 5% over the next few
years, a step up from the previous five
years. Eaton trades at 22 times 2021
earnings estimates of $4.88, a pre-
mium to its historical average.
But Inch thinks that is reasonable.
“Eaton is still covered heavily by ma-
chinery analysts who count tractors
and heavy trucks,” he says. With more
than 60% of sales in its electric busi-
ness, Eaton shouldn’t be viewed
against other commercial vehicle
stocks. The stock, says Inch, is a
“stealth opportunity that definitely
hasn’t been completely recognized or
been priced in.” He has a Buy rating
on the shares and a $120 price target,
up about 12% from a recent price of
$107.
Caterpillar
Caterpillar will benefit just as it has in
previous industrial cycles: by supply-
ing the industry with the machines
necessary to build whateverneeds to
be built. Caterpillar’s sales growth
accelerated in the 1980s and again in
the 2000s. Sales are likely to acceler-
ate in the coming decade, and this
time around the company can also
improve profit margins and make
sales a little less cyclical by adding
services related to connecting and
monitoring machines.
By 2019, Caterpillar had one mil-
lion connected machines around the
globe. Its stock is trading for about 21
times estimated 2021 earnings of
$7.26 a share—but that may not be as
expensive as it appears. Cyclical com-
panies like Caterpillar typically trade
at high price/earnings ratios when
earnings have sagged. Caterpillar’s
earnings are well off its previous
peak earnings of about $11 a share in
2018, when its P/E ratio was about 13
times.
The time to buy Caterpillar is when
things are starting to get better. And
things are getting better. Wall Street
expects sales to rise about 8% a year
for the next four years, hitting $56
billion by 2024, after growing at a 2%
clip from 2016 and 2020.
In the expected industrial upturn,
shares can trade up 50% from Cater-
pillar’s average price of $144 during
2017-18, when Caterpillar last pro-
duced peak earnings. That is roughly
$210 to $220 a share—about 20%
higher than CAT stock’s all-time
high, set at the start of 2018.
Quanta Services
Quanta Services, an engineering and
construction company that builds
electrical infrastructure and other
projects, has been helped by the shift
to renewable energy. Revenue from
electric-power construction totaled
$7.1 billion in 2019, or 59% of its total
revenue, up from $5.3 billion in 2014.
Those sales could grow to $10.3 bil-
lion by 2024.
“Look at business and investor
sentiment around carbon-free and
technology; we are enabling those
things,” Quanta CEO Duke Austin
tells Barron’s.
Profit margins, meanwhile, are
expected to improve from about 5.1%
in 2020 to 6.7% in 2024. It also has a
strong backlog of projects to buttress
growth. At a recent price of $59, the
stock trades at about 14 times 2021
earnings, a little higher than its five-
year average of 12 times. Still, that
isn’t expensive relative to the market,
and some premium is warranted.
“There is a slightly more recurring
nature to their earning stream,” Baird
analyst Andrew Wittmann tells Bar-
ron’s. He says that Quanta is adding
smaller contracts to what is normally
a boom/bust construction cycle, effec-
tively serving as an extension of a
utility customer’s labor force.
“We are craft-skilled labor, that’s
what we are about,” Quanta’s Austin
says. He doesn’t like to subcontract
business, and believes it gives Quanta
a competitive advantage.
Wittmann rates the shares the
equivalent of a Buy and has a $60
price target.
Rockwell Automation
Rockwell Automation isn’t cheap—
it trades at just over 30 times fiscal
2021 earnings-per-share estimates of
$7.96—but it doesn’t need to be.
Rockwell is the largest pure-play
industrial automation company in the
world. It specializes in both “discrete”
automation—controlling a robot on
an assembly line, for example—and
process automation products, which
manage continuous operations such
as food production.
“There are only a handful of global
automation suppliers,” says Haskett’s
Inch. He expects Rockwell stock to
hit $250 from a recent $241, which
would work out to 31 times the
Street’s earnings forecast. Inch, how-
ever, sees earnings reaching $8.85 a
share in fiscal-year 2022. If he’s cor-
rect, the stock would trade at 28.2
times. The Wall Street consensus for
2022 earnings is $9.21 a share, an
increase of 16% over the prior fiscal
year.B
Five stocks that can benefit from Big Data, automation, and electrification.
Caterpillar / CAT $156.66 6% $84.8 $42.7 $7.26 21.6 2.6% The iconic machinery company is getting a tech boost
Schneider Electric /SU. France €107.45 17 71.6 31.2 5.90 21.5 2.1 Abeneficiaryofautomation,electrification,andBigData
Eaton / ETN $107.48 14 43.0 17.9 4.88 22.0 2.7 About two-thirds of sales come from electrical business
Rockwell Automation / ROK* 241.12 19 28.0 6.7 7.96 30.3 1.7 Thelargestpure-playautomationcompany
Quanta Services / PWR 59.00 45 8.2 12.0 4.04 14.6 0.3 Theswitchtorenewableswillbenefitthisbuilderofelectricgrids
Compay / Ticker Price Change Value (bil) (bil) EPS P/E Yield Comment
Recent YTD Market Revenue2021E 2021E Dividend
2021E
The Industrial Future
*September fiscal-year end; E=Estimate Source: Bloomberg“You don’t
want to
be on the
wrong
side of the
informa-
tion
divide.”
Nicholas Heymann,
William Blair
analyst
Techstockshavebeenoutperformingindustrialsforsolongthatitmaybetimetoswitch.
Reverse Course
Source: Bloomberg1997 2000 2010 2020
0
300
200
100
800%
700
600
500
400
Nasdaq Composite Russell 3000 Industrials