Investing in thematic trends can be a good idea because it usually means putting money into companies that can benefit throughout the economic cycle. In this context, the fourth industrial revolution makes industrial software company PTC (PTC 0.96%) attractive. Likewise, the need to reduce carbon emissions in buildings makes Johnson Controls (JCI 0.72%) a growth stock worth buying. Finally, positive aerospace and defense spending trends make Raytheon Technologies (RTX 0.60%) worth a look. Here's why.
PTC and the fourth industrial revolution
Otherwise known as Industry 4.0, the term refers to the growing use of digital technology to improve the performance of physical assets. One example is the creation of digital twins, whereby a physical asset is copied digitally. Modeling the twin allows data garnered from the physical twin to simulate and model the physical assets' behavior and ensure optimal performance. For example, a bottling production line can be modeled digitally in order to better predict when it needs to be serviced.
Another example includes augmented reality (AR), which allows a digital overlay of a physical asset so technicians can provide better service equipment. Moreover, with AR, the equipment could be serviced without a key technician even being present. As with the example above, a technician could see a digital overlay of the machine in order to service it quickly.
That's where PTC comes in, offering both AR solutions and Internet of Things (IoT) software that connects physical assets to the digital world. PTC collectively calls them its growth products. In addition, PTC's core product offerings, computer-aided design (CAD), and product lifecycle management (PLM) have growth opportunities through their transition to a software-as-a-service (SaaS) model. CAD and PLM are also beneficiaries of the digital revolution as engineers can better build, design, and manage assets using digital tools.
It all adds up to a company with a long runway of growth ahead of it, namely technology that creates real and tangible value for customers.
ESG investing and Johnson Controls
The building sector generates about 40% of global carbon dioxide emissions. It's a stat that Johnson Controls' management uses to point out the relevance of its building products solutions to its customers' efforts to reach net-zero carbon emissions targets. If corporations are serious about hitting net-zero targets, improving building efficiency is going to be a high priority.
That argument speaks to the building retrofit opportunity that management sees ahead. During the investor day presentation in September, the company noted that its annual addressable market was some $300 billion. On top of that figure, there is an additional market opportunity over the next decade estimated at $250 billion. The additional opportunity comes from a combination of decarbonization requirements, the need to create healthy and clean buildings (particularly in the wake of the pandemic), and the growth of smart technology in buildings.
Johnson Controls offers heating, ventilation, air conditioning, and refrigeration (HVACR) equipment, smart building controls, and fire and security equipment. However, around 27% of its sales come from services (for HVACR, fire, and security), whereby Johnson Controls ensures the efficient functioning of its customer's buildings. Using Johnson's OpenBlue software platform, customers can generate actionable insights to improve building performance.
All told, the company is an excellent way to get exposure to the environmental, social, and governance (ESG) investing theme, especially with the transition to a net-zero carbon economy.
Raytheon Technologies is firing on all cylinders
Raytheon's defense business (space, intelligence, and missile defense) is attracting attention due to the prominent role played by its Javelin portable anti-tank missiles and Stinger portable air defense missiles in the conflict in Ukraine. As such, increased future orders for these technologies seem assured.
However, the company's commercial aerospace businesses -- namely, Pratt & Whitney aircraft engines and Collins Aerospace solutions -- are the key to its long-term investment case. According to industry experts, the commercial aviation industry got hit hard by the pandemic, and full recovery to 2019 levels isn't likely until 2024.
No matter. Recovery is a recovery, and investors can likely look forward to a multi-year period of growth as commercial flight departures grow sequentially. Moreover, Raytheon's management currently believes it will hit $10 billion in free cash flow by 2025 (and this may be upgraded in light of recent events in the defense business).
Finally, with the stock currently trading at a $150 billion market cap, it continues to look to be a good value. For example, based on the current share price, Wall Street consensus has Raytheon trading at a reasonable 15 times estimated free cash flow in 2025 when it should be in full recovery mode -- and with excellent growth prospects thereafter.