Please ensure Javascript is enabled for purposes of website accessibility

3 Companies Set to Win the Industrial Internet of Things

By Lee Samaha - Apr 1, 2016 at 1:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Industrial companies have a significant opportunity to grow with the Internet of Things, and large blue-chip companies are in prime position.

In a world getting used to global growth rates at far lower levels than in previous decades, large industrial companies can't simply rely on revenue growth in order to increase earnings significantly. Something more is needed. One of those "somethings" is the Industrial Internet of Things (IIoT), and there are three early adopters set to win out. Let's take a closer look at them.

Back to basics
In the past year, General Electric Company (GE 2.27%) CEO Jeffrey Immelt has finally begun to win plaudits for transforming the company, returning it to its industrial roots. A big part of his plans involves the company's expansion of its industrial Internet solutions. In a nutshell, General Electric will increasingly embed Internet-enabled devices into its hardware solutions in order to capture and analyze data on its Predix platform. Why is this so key in a low-growth world?

Simply put, it creates scenarios in which General Electric can grow margin and earnings without much help from the economy.

  • Using the industrial Internet will result in internal productivity improvements -- such as reducing production costs on its new LEAP engine -- resulting in margin expansion.
  • Adding software and analytics to hardware solutions creates added value for customers, and will help grab market share.
  • Analytics capability will support General Electric's services offerings -- how it generates the majority of its industrial profit.
  • Predix-based analytics will offer a value-add solution to hardware customers, and also help retain customers -- so General Electric will generate more revenue from existing customers, while the cost of customer acquisition should drop.

In all these points there is a common theme: They all involve cutting costs or maximizing the lifetime value of a customer, and none of them necessarily rely on economic growth. In other words, growing the bottom line (earnings) while the top line (revenue) is only growing moderately.

A natural fit
Most of the investment attention on Danaher Corp. (DHR 5.87%) in 2016 will focus on its integration of Pall Corp. and Danaher's subsequent split into two companies. All of which makes perfect sense in the near term -- but investors shouldn't lose sight of the long-term opportunity from Danaher's IIoT operations.

Back in the summer of 2014, Danaher's then-CEO Larry Culp disclosed that a third of the company's engineering head count was already employed in digital activities -- in other words, embedding software in its solutions. Why does this matter, and why is it such a specific opportunity for Danaher?

The answer lies in understanding the following graphic.

Image source: Danaher presentations.

The businesses shown will comprise the post-split Danaher, and as you can see, they all contain a high degree of recurring revenue. Examples of recurring revenue include consumables and services in diagnostics and life sciences, and across Pall Corp.'s operations.

The opportunity facing Danaher comes from embedding more software in its equipment, thereby spurring increased consumables sales and keeping customers engaged with Danaher's services. Moreover, analyzing data from customer usage of equipment can create valuable opportunities for the company to modify its customer offerings.

Right timing, right markets
As you can see below, Honeywell International (HON 1.68%) is taking IIoT very seriously -- in fact, nearly half of its engineering force is currently employed developing software.

Image souce: Honeywell International presentation.

As with General Electric, Honeywell's aerospace and building solutions (automation and control solutions, or ACS segment) are a natural fit for IIoT, because airplanes and buildings are in constant need of monitoring and servicing -- generating long-term revenue growth for Honeywell.

In fact, Honeywell expects that by 2020, around 60% of its aerospace sales will be from products with software embedded, and a further 6% from stand-alone software. The ratios for ACS are expected to be 74% and 7%, respecitvely.

Moreover, the performance, materials, and technologies (PMT) segment -- not activities easily associated with IIoT -- is also expected to derive 22% of its sales from software-embedded products, and a further 9% from stand-alone software. Opportunities in PMT include using IIOT to optimize sales of catalysts and absorbents to the refining and processing industries, and sales of refrigerants to supermarkets.

Large companies to win out
All three of these companies are leaders in their fields and have large installed bases into which they can embed IIoT solutions. In other words, they already have strong advantages over the competition.

In addition, it takes significant resources to build a platform such as General Electric's Predix, and hiring scores of software engineers isn't an activity that smaller rivals can easily afford. All told, IIoT is likely to favor the large and early-stage adopters, and all three companies are set to be winners in the coming decade.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$78.76 (2.27%) $1.75
Honeywell International Inc. Stock Quote
Honeywell International Inc.
HON
$196.35 (1.68%) $3.25
Danaher Corporation Stock Quote
Danaher Corporation
DHR
$266.49 (5.87%) $14.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.