Manufacturer of security doors and locks Allegation (GO -1.64%) and industrial conglomerates Honeywell International (HON -0.71%) and Roper Technologies (ROP -1.27%) are not the first companies that come to mind for investors when they think of technology companies. But the key to the investment case for all three stocks is the technology being developed. As such, investors in this space should take a look.
1.Honeywell International
The management of the industrial giant intends to become a “software industrialist”. It wants to achieve this by continuing to roll out its analytics software platform, Honeywell Forge. The platform enables industrial companies to digitally transform their operations.
For example, building owners can use Honeywell Forge to combine a mass of digital data gathered from the building and produce actionable insights to improve building efficiency and meet carbon emissions goals. This is the so-called “intelligent building” concept. It’s similar to improving the performance of a retail warehouse or an airplane.
As such, Honeywell Forge’s relevance plays across Honeywell’s portfolio of industrial assets, from aerospace and building technologies to materials technology and productivity solutions.
The company’s software business, Honeywell Connected Enterprise (HCE), has grown its recurring software revenue at an annual rate of 14% since 2019, and management believes that this HCE growth will also drive sales growth in its software segment. industrial products. Additionally, margins should increase over time since software companies generally have a higher margin profile.
All of this means it’s time to stop thinking of Honeywell as just an industrial company. Instead, her investments in software (including an exciting quantum computing venture) mean she is being leveraged for the growth of digital technology in the industrial world.
2.Roper Technologies
Honeywell’s move from a New York Stock Exchange listing to a Nasdaq listing in 2021 reflected its transformation into an industrial software company, so the 2015 name change from Roper Industries reflected its ongoing development.
Roper Technologies operates an unusual but very successful business model. Management acquires high-margin, asset-light niche market players and brings them into the business. However, they tend to remain under their current management. Operational decisions are made at the local company level, with Roper’s senior management handling capital allocation issues and providing support. The cash flows generated by acquired businesses are then collected centrally, used to pay down debt, and the acquisition process begins again.
Following this strategy over the years has led to a company heavily focused on software. This process has been accelerated by the recent announcement of the sale of most of its industrial activities, including its process technologies and its measurement and analysis activities.
Roper will now report its business through three segments: application software, network software and technology products. The business portfolio includes niches such as business management software for law firms, software solutions for the commercial construction industry, and automated meter reading technology, among others.
All of this means that investors should view Roper as a software company, and once the market recognizes this fact, a valuation reassessment could result. It would make sense for savvy investors to use traditional software companies as peers for valuation purposes, and Roper is looking pretty cheap right now, as the chart below shows.
Data by YCharts.
3. Allegation
The security door and lock business currently generates 80% of its revenue from mechanical products, with the remaining 20% from electronic products. However, it has significant growth potential thanks to the convergence of mechanical and electronic technologies and the increasing use of connected digital solutions using the Internet of Things (IoT).
With digital technology, commercial building owners can better manage, control and monitor who has access to what area and how much time they spend there. This brings safety and productivity benefits to building owners.
Additionally, the current penetration rates for electronic locks in the non-residential and residential markets are low (7% for US residential and 14% for US non-residential), giving Allegion a long growth path ahead of it.
Allegion is not a technology company at the moment, but its growth potential lies in the growth of digital technology, which makes its stock attractive to technology investors.
Lee Samaha holds positions at Honeywell International. The Motley Fool holds positions and recommends Adobe Inc., Autodesk, and Salesforce, Inc. The Motley Fool recommends Roper Technologies and recommends the following options: $420 Long Calls January 2024 on Adobe Inc. and $430 Short Calls January 2024 at Adobe Inc. The Motley Fool has a Disclosure Policy.
