First, it was mechanics. Second, it was electrical and rail. By the third, it was the use of software and communication in production. The fourth industrial revolution will be the iterative interaction between the digital and physical worlds.
This latest sea change in industrial production will allow a select group of companies to get ahead if they can take advantage. This includes technology company Trimble (TRMB 0.19%), industrial software company PTC (PTC 0.38%), and heating ventilation and air conditioning (HVAC) manufacturer Carrier Global (CARR 0.28%).
Here's why all three stocks offer investors a way to play the fourth industrial revolution.
Image source: Getty Images.
1. Trimble
The tech company's origins lie in creating tools for GPS (i.e. mapping) and positioning (i.e. points on road construction). Later, it added tools for what the company calls "productivity" (think the monitoring of trucking fleets to ensure route optimization). The next stage in its evolution is to become part of its customers' "integrated work process." This is where the fourth industrial revolution comes in.
An integrated work process involves taking the data created by customers' assets (tractors, trucking fleets, construction machinery, etc.) and compiling it with Trimble hardware and then connecting it all digitally and analyzing it to find potential ways to iteratively improve performance. For example, Trimble clients in construction and infrastructure fields could use its technology to help ensure the timely execution of projects, find ways to save money, and reduce carbon emissions in the process. In agriculture, the precision agriculture revolution is already taking place, with farmers using positioning technology to gather data to help make better decisions about planting, growing, and harvesting. In transportation, companies need to optimize routes, reduce fuel, and improve capacity utilization and Trimble products help them do that in real-time.
Not only will the expanding of the digital revolution bring revenue expansion opportunities, but Trimble's higher-margin software and recurring revenue will grow as a share of overall revenue -- implying margin expansion along the way.
Image source: Getty Images.
2. PTC
The industrial software company didn't quite fire on all cylinders in 2021. Going into the year, expectations were high that customers would step up the adoption of PTC's growth products (internet of things, or IoT, and augmented reality, or AR). However, by management's own admission, it could have been better. For example, on the fourth-quarter 2021 earnings call in November, CEO Jim Heppelmann said "looking at our growth products, IoT grew mid-teens coming in below our target. However, bookings were strong in Q4, and we expect stronger ARR growth in fiscal '22."
By ARR, Heppelmann refers to the annual run rate, or the annualized value of active subscription software, cloud, software as a service (SaaS), and support contracts at the end of the period. That said, the company's overall organic ARR growth in 2021 was still 12%, a credible performance at the top of its initial guidance range. In addition, its core products (computer-aided design, or CAD, and product lifecycle management, or PLM software) outgrew the market and were up 20% since 2019, according to Heppelmann on the earnings call.
The case for PTC being a fourth industrial revolution play lies mainly in its growth products. Its IoT software connects physical assets to the digital world, and augmented reality solutions overlay the digital world onto physical assets, so they can be better serviced and monitored.
In addition, PTC is accelerating the Software-as-a-Service (SaaS) transition of its CAD and PLM software. Moreover, CAD and PLM are a critical part of its customers' digital transformation, and moving them to the cloud will facilitate this. For example, cloud-based CAD allows more functions of a company, say sales and marketing, to collaborate in a product's design.
All told, PTC's software lies at the heart of the fourth industrial revolution, and once the supply chain issues that restricted customer spending in 2021 are passed, it wouldn't be surprising to see strong growth for many years to come.
Image source: Getty Images.
3. Carrier Global
Why is a company best known for air-conditioning a play on the fourth industrial revolution? The answer lies in the fact that one of the central tenets of Carrier's growth strategy is to increase service attachment rates. In plain English, this means Carrier will sell more service agreements attached to its equipment.
It intends to do so by growing its digital offerings. For example, web-enabled devices embedded in Carrier's HVAC equipment and other digital devices can be used to remotely monitor and predict servicing of equipment, thus enhancing value for customers. That's something highly likely to increase attachments rates and lead to more higher-margin service and recurring revenue for Carrier.
The evidence so far suggests Carrier is achieving this aim. For example, at the start of 2020 management was converting just 20% of customer units coming off warranty into long-term service agreements. That figure rose to 30% at the end of 2020 and then hit 35% by the third quarter of 2021. Moreover, at the end of 2020, Carrier had 50,000 chillers under long-term agreements with a plan to increase by 10,000 a year. The good news is management confirmed during the last earnings call that the company is on track to hit the target of 60,000 long-term contracts in 2021.
As such, Wall Street analysts expect Carrier to expand its operating margin from 13.8% in 2021 to 15.6% in 2023 with operating profit rising at a high-single-digit annual rate over the same period.
