Three very different stocks all offer investors an opportunity to benefit from structural changes in their end markets that have been inspired by technology. Agricultural equipment company Deere (NYSE:DE) has a growth opportunity from its smart farming solutions. Zebra Technologies' (NASDAQ:ZBRA) mobile computers, barcode scanners, and printers help companies better manage their assets. Meanwhile, smart water technology company Xylem (NYSE:XYL) is seeking to expand sales of its smart analytics solutions. All three have long-term growth prospects which could lead to good returns for investors in the coming years, so let's take a closer look at them.
Despite some very difficult end-market conditions in the last few years, Deere continues to seek strong rates of adoption for its precision agriculture solutions.
These technology-driven solutions (including telematics, onboard computers, and analytics) help farmers to better steer, guide, and control farming equipment. Meanwhile, the automated data collected from Internet of Things (IoT) sensors can then be analyzed in order to control planting and seeding and ultimately improve crop yield.
As previously argued, Deere's valuation may seem high (trading on 29 times estimated 2020 earnings), but it's a highly cyclical company and 2020 is likely to mark a multi-year trough. In fact, its valuation is pretty much in line with what Deere has traded on in previous troughs.
However, the difference this time around is that Deere's precision agriculture solutions are likely to contribute to driving sales in the future. Not only is there a recurring element to the aftermarket/service sales, but the precision agriculture solutions will keep customers loyal to Deere's machinery, and create added value to Deere's equipment.
Meanwhile, the aging fleet of U.S. farming equipment should lead to a natural replacement demand cycle in the coming years, and farmers are slowly getting over the initial shock of the trade conflict affecting soybean demand from China.
All told, everything points to a multi-year sales recovery for Deere, and the stock remains attractive for investors.
Zebra's barcode scanners, mobile computers, and printers help companies gather and analyze data in real time. The company's handheld technology may seem archaic and contrary to the trend toward automation, but the reality is that Zebra's solutions are actually in support of it.
Zebra's key end markets are retail/e-commerce, manufacturing, and transportation/logistics, and to a lesser extent, healthcare. Retail and aviation passenger demand is seen as challenged in the current environment, but other end markets may turn out to be net beneficiaries of the COVID-19 pandemic.
For example, e-commerce is growing strongly, and the pressure to intelligently automate manufacturing, transportation, and healthcare means customers will need to gather real-time data to analyze and act upon. Moreover, Zebra's main competitor, Honeywell, believes its directly comparable business grouping, productivity products, will return to growth in the second half, and the company looks set to continue its track record of mid-single-digit revenue growth in the future.
Turning to valuation matters, Zebra tends to be very good at converting earnings into free cash flow. On this basis, the stock looks very attractive.
Sustainable water technology company Xylem generates around half of its sales from water utilities, around a third from industrial water treatment, and the rest from commercial/residential water. Demand from the industrial sector will ebb and flow with the industrial economy, so it's not surprising that it's been hit this year. The pandemic has also negatively affected Xylem's supply chain and its ability to serve its utilities customers. As a result, organic sales declined 12% in the second quarter, and analysts are expecting a reported sales decline of 10% in 2020.
Regardless, Xylem still looks to have some strong long-term growth prospects. The excitement centers on its smart infrastructure solutions, namely advanced infrastructure analytics (AIA). Leakage, theft, and inaccurate billing are major issues for water utilities, and Xylem's AIA solutions use web-enabled technology to help intelligently monitor and control these issues.
As the economy recovers, Xylem's industrial wastewater treatment revenue should pick up, and there's a long-term opportunity from expanding AIA sales to utilities.
Trading on 32 times estimated 2021 earnings, Xylem certainly isn't a cheap stock, and cautious investors will wait for a pullback. However, its long-term prospects look assured, and investors can feel confident about the company growing earnings well into the future.