The 4th Industrial Revolution is here. According to a recent World Economic Forum headline, that revolution builds on his three previous industrial revolutions to harness human behavior, biological/physical processes, and digital technology. We empower everyone by integrating these technologies in meaningful ways that benefit our global society.
Previous industrial revolutions were:
- The rise of steam power in the late 18th century,
- Use of electricity to power machines in the late 19th century
- The shift to digital electronics started in the 1970s.
The Fourth Industrial Revolution will fundamentally change the way we live, work and interact. This is a new chapter in human development, made possible by extraordinary technological advances that rival those of the first, second and third industries. revolution.
In other words, the electrification of automobiles, advances in medical technology, industrial construction of data centers, and AI integration happening in Microsoft Corporation (MSFT), ChatGPT, Apple (AAPL), C3.ai, Inc. (AI), and more. , renewable energy, utilities, sustainable infrastructure, robotics, and the general automation and digitization of society all converge in some meaningful way without disrupting the current social fabric too negatively. need to do it.
There are some indications of 4.th The Industrial Revolution was stalled and put on hold by the Covid-19 pandemic and subsequent supply chain disruptions, inflation and fears of a looming recession. What this means is that we have an opportunity to resume progress in 2023. Towards the goal of this next revolution, we will advance the use of convergent technologies to improve society.
Industry 4.0 technologies have a role to play in this transition. For example, the rethinking of global supply chains resulted from the need to reduce labor costs.
Great advances in manufacturing have benefited from this latest industrial revolution. Connected physical and digital systems and assets, advanced automation, digital intelligence, and other key factors are benefiting various industrial processes and sectors. The author, Cem Dilmegani, in his blog, A Guide to the Fourth Industrial Revolution (Industry 4.0), includes the diagram below to illustrate the concept.
The global Industry 4.0 market was estimated at $70 billion in 2019 and is expected to reach $210 billion by 2026. This is because more manufacturers are optimizing their digital transformation strategies. Industry 4.0, also known as the Fourth Industrial Revolution, is the creation of smart manufacturing machines and systems that are connected, automated, and thoroughly analyzed to improve production, reduce costs, and optimize processes. intended to create.
In my research on growth stocks that could benefit from these growth trends and process improvements, a few companies stand out that I think are worth mentioning. One company I want to focus on in this article is Powell Industries, Inc.Nasdaq: POWL) based in Houston, Texas. Given its strong debt-free balance sheet, diversification of its business portfolio, solid growth with an expanding total market served (TAM), and focus on Industry 4.0 solutions, which require increasing electrification requirements in all sectors , I think POWL is a buy in the long run. Global landscape and domain expertise in large and complex projects. However, the stock is currently around $45 and due to the recent post-earnings surge, I rate this stock as a hold.
Powell specializes in the design, manufacture and packaging of equipment and systems for the distribution and control of electrical energy. This slide from our February 2023 investor presentation provides an overview of our products and services.
The company was founded in 1947 to focus on Houston’s growing petrochemical industry. Today, POWL is a solution provider for complex electrical applications worldwide, serving the oil, gas and petrochemical industries as well as other light industrial and commercial sectors such as utilities, transportation, metals and mining, pulp and paper mills. also offers products and services. and data centers.
POWL’s current market capitalization is just over $500 million and the stock has gained more than 120% over the past year. The stock trades at 41x forward P/E, 1.09x projected 2023 EPS, and pays a 2.3% dividend yield. The company reports revenue of $522 million for his 2022 fiscal year and has an unleveraged balance sheet with zero debt.
A projected P/E of over 40 seems expensive, but the company has experienced impressive growth over the past few years, earning it the #1 rating in the SA Quant rating system for both the electrical components and equipment industry and the industrial sector as a whole. I am receiving
With that in mind, I wanted to dig a little deeper to understand what the company is doing right to achieve such high rankings. We would like to explore whether we are just experiencing a high point, or whether it will be followed by another recession, as suggested in our previous articles covering equities in 2017 and more recently in 2020. was
Powell started as a company focused on the petrochemical industry in Texas, but the business has grown into other end markets,th The industrial revolution, new technologies, and the development of ever-expanding opportunities are opening up new possibilities to move beyond the cyclical oil and gas business that has historically offered us. For example, this slide from our February 2023 investor presentation shows several new short- and long-term opportunities.
The 2022 revenue mix was approximately 40% Oil & Gas, 23% Utilities, 13% Petrochemicals, 11% Commercial and Light Industry, 8% Local Government and 5% Other. So far in 2023, the composition has moved away from oil and gas by about 5%, shifting instead to commercial and other industries. It is a deliberate move to diversify its business more broadly into other sectors that are less cyclical in the long term, such as government, universities, and OEM relationships, in addition to the sector. .
Powell’s strategic focus areas include leveraging expertise in electric automation solutions to meet the growing need to protect, monitor and control high-value assets. Expand your service franchise to meet geographically dispersed strategic opportunities and use digital technology to improve operational performance. We will also diversify our product portfolio to target tangential applications and extend our reach into new electrical technologies, while also de-risking our business by offering cyclical products.
Solid performance and strong financials
Looking ahead to 2023, the first quarter of fiscal 2023 (quarter ending December 31, 2022), reported on January 31, showed strong results, with a record backlog of $680 million, up from a year earlier. year-over-year growth of 63% and new orders of $212 million. period of the previous year. Revenue increased 19% year over year to $127 million. Net income was $1 million ($0.10 per diluted share) compared to a net loss of $2.8 million ($0.24 per diluted share) in the prior year.
The company has $111 million in cash and short-term investments as of December 31, 2022 and has no current debt or leverage. With the exception of a post-pandemic slowdown in 2021, the steady increase in backlog every year since 2018 means the company will continue to grow organically, as explained above, as it diversifies and expands its product offerings. It shows that it continues to grow through expansion.
As Chairman and CEO Brett A. Cope explained on the earnings call, a record backlog provides a diverse mix of project activities and helps drive future margin and earnings growth.
“Activity in the core oil, gas and petrochemical markets continues to strengthen as we book another large industrial order to support domestic production of liquefied natural gas. Market conditions across the industry sector remain strong, supported in large part by steady volumes of small and medium-sized project activity. provide a strong mix and focus on executing these projects in fiscal 2023, which will help drive margin and profit growth Build a backlog to support fiscal 2024 and beyond .”
Additionally, with two upward revisions issued in the last 90 days and an EPS revision, earnings growth continues and is expected to improve further over the next few years. Earnings results have exceeded expectations over the past three quarters, and given the strong backlog and strong fundamentals, additional growth drivers are in place due to increased demand in electrification and automation in the market. Future reports are very likely to continue to exceed expectations. As described above.
Comparison with other companies in the same industry
With a grin, I decided to compare Powell Industries, Inc. to several other strong, growth-oriented companies that also benefited from 4.th Industrial Revolution, and while not all are direct peers or competitors, have all performed very well in the past year and are poised to continue to perform well in the future . These companies include Atkore Inc. (ATKR). Kimball Electronics, Inc. (KE); I’ve written about Muller Industries (MLI) before here and here. And Encore Wire (WIRE).
From a price perspective, POWL was the clear leader last year, but has been a laggard for the past three years.
POWL and MLI are evenly matched in the ratings and quant rankings, followed closely by KE.
I really like all 5 of these stocks. If you’re interested in growth stocks that are likely to benefit from the Industry 4.0 trends outlined above, we think all five stocks are worth further scrutiny. Previously he owned both WIRE and MLI and now he owns shares in ATKR. I haven’t dug deep enough into the KE yet to decide whether to buy it or not, but my first look is encouraging. And of course I love him POWL, but I haven’t pulled the trigger yet.
All five of these stocks carry some risks, mainly based on what happens to the global economy as a whole in the coming months.Trends so far in 2023 show signs of economic recovery While generally bullish from 2018, high inflation continues and the end of rising interest rates is not in sight, which could have a negative impact on most, if not all, of these stocks.
Current valuations have moved up a bit over the past few months and could pull back if the overall market returns to bearish mode within the next week or two, so the worst is past before you buy. We are watching closely for signs that we may have I rate Powell Industries Hold at its current price of about $45. We recommend waiting for a market rally to get a better entry point for the stock. Someone more experienced in technical analysis might be able to suggest what prices to look for, but it looks to me like he has support around $38. If the price drops to that level in the next few weeks, I’ll be a buyer. during a market recession.
Longer term, as earnings forecasts continue to revise upwards, we can imagine Powell Industries stock trading at around $3, 20 times earnings expectations, with a price target of $60 by 2025. . In the meantime, price volatility is to be expected as this is a small-cap stock with a history of cyclical fluctuations in price action.