Are Industrials on the Verge of a New Revolution?
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: The original article refers to Darius Adamczyk as the CEO and President of Honeywell. That is incorrect, this version has been corrected and Motley Fool apologizes for the error.
Industrial firms are pouring much of their time and resources into better integrating technology with manufacturing in an effort to make the process more efficient and results-driven.
That could result in a slew of new opportunities for companies like General Electric (NYSE: GE), Honeywell (NYSE: HON) and Emerson Electric (NYSE: EMR), but which company is positioned to profit the most?
Technology expected to fuel new industrial revolution
According to Honeywell Process Solutions' President and CEO Darius Adamczyk, industrials and technology are integrating fast. General Electric is developing ways to connect people and data at an increased speed compared to what was possible before. The company visualizes an industrial Internet network that can combine industry with the worldwide web.
In fact, GE CEO Jeff Immelt said the company is dedicating $500 million to the mission. This could result in a multitude of connections being made between industrial products and people. Much of the growth in this area is in China, Immelt said. He estimates $3 trillion could be made from the "industrial Internet" by 2030. Knowing which company could stand to make the most profits is key.
A case for General Electric
In comparing General Electric, Honeywell and Emerson, one of these companies is much larger than the others and is in the best position to pour money into research and development. With a market cap in excess of $240 billion, General Electric is worth about four times more than Honeywell ($60 billion) and six times more than Emerson ($40 billion.) Their dividend yields are 3.3%, 2.1% and 1.6%, respectively. The P/E ratios are 16.4, 19.9, and 19.8, respectively.
Those numbers tell us that General Electric is cheaper right now based on the company's earnings. Furthermore, the firm pays its investors a higher dividend. But do these numbers tell the whole story?
General Electric fundamentals
GE's PE ratio of 16.4 is below the capital goods average 21.2, which means there is relatively low confidence in the stock by investors. This could present a buying opportunity if investors are wrong. The company has also reduced the percentage of debt that it used for its capital structure this year: the debt-to-total-capital ratio is just over 75%, and GE is a highly leveraged company compared to many firms in the capital-goods industry. However, the reduction shows the firm is becoming more reliant on its own capital and indicates a stronger financial position than in previous years.
A case for Honeywell
Like General Electric, Honeywell is a very diversified company that is savvy in many areas. In the first quarter, earnings increased by 17%, but net sales were relatively static when looking at the same period of 2012.
The company would benefit from an industry more integrated with technology. The more in touch the company is with improved integration of industrials and technology, the better able it will be at taking advantage of the expected doubling of the number of aircraft around the world in the next two decades, which is expected according to Boeing estimates.
Technological integration would mean Honeywell could better compete with Boeing for aircraft sales in this massive market.
The company boasts of sound financials. Its vast diversification is a business strategy that is working for the company. Honeywell has one of the highest return on investment in its sector. The company's profit margin is over 8% and the asset turnover is nearly 92. The debt-to-total-capital ratio is 36%, which is about average in the sector, though if its solid profit margin continues, that ratio would likely lean more into the company's favor.
A case for Emerson
Emerson has managed to increase its net income and revenue growth without substantial debt. Its financial position is solid and sound management can allow the firm to concentrate on the industry of tomorrow. Healthy cash flow from operations allows the company to position itself as a leader in the new industrial revolution.
The company is already a leader in industrial automation, and the firm has identified a demand for technology helping to facilitate machine availability and reliability. This could lead to flexibility in manufacturing and the ability to develop a wider range of products at a fraction of the time it took in previous years. This could also lead to improved efficiency and less waste.
The solid financial foundation of Emerson also means the firm will grow in the years ahead. Like Honeywell, Emerson has one of the highest returns on investment than any other company in its sector. At nearly 9%, the profit margin shows this company isn't likely to be taking on deficits any time soon, and with the firm's indication that demand will increase, profit will likely roll in as well.
Breaking it all down
Looking at these three companies in a pure valuation perspective, General Electric appears to be the best stock to own. However, the dividends paid by the company over the years haven't been as consistent as those paid by Honeywell and Emerson. Still, I have confidence in GE's vision. While General Electric was hard-hit by the recession, lower debt indicates the company is ready to move ahead.
I believe the long-term prospects for GE are very positive, but I am less certain about the shorter-term potential -- so is the market, and that has kept GE's price attractive. Investors who want to get in on GE now before the company starts building momentum again and the price goes up are taking on short-term risk. But as a long-term investor, the overall potential of the firm outweighs any possible short-term setbacks.
For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, The Fool's offering comprehensive coverage for investors in a premium report on General Electric, in which The Fool's industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE today. To get started, click here now.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Emerson Electric Co.. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!