Security door and lock maker Allegion (ALLE -1.64%) and industrial conglomerates Honeywell International (HON -0.71%) and Roper Technologies (ROP -1.27%) are not the first companies that spring to investors’ minds when thinking about technology companies. But the key to the investment case for all three stocks lies in the technology under development. As such, investors in this space should take a look.
1. Honeywell International
The industrial giant’s management intends to become a “software industrial”. It wants to get there by the continued rollout of its analytical software platform, Honeywell Forge. The platform enables industrial companies to transform their operations digitally.
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 “smart building” concept. It’s similar to enhancing 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 to building technologies, materials technology, and productivity solutions.
The company’s software business, Honeywell Connected Enterprise (HCE), has grown its recurring software revenue at a 14% annual run rate since 2019, and management believes this growth in HCE will also power sales growth in its industrial product segment. Moreover, margins should expand over time since software businesses typically have a higher-margin profile.
All this means it’s time to stop thinking about Honeywell as just being an industrial company. Instead, its investments in software (including an exciting quantum computing business) mean it’s leveraged to the growth of digital technology in the industrial world.
2. Roper Technologies
Honeywell’s shift from a New York Stock Exchange listing to a Nasdaq listing in 2021 reflected its becoming a software-industrial company, so Roper Industries’ change of name in 2015 reflected its ongoing development.
Roper Technologies operates an unusual but highly successful business model. Management acquires high-margin, asset-light, niche-market players and integrates them into the company. However, they tend to remain under their existing management. Operational decisions are made at the local company level, with Roper’s senior management looking after capital allocation matters and providing help. The cash flow generated from the acquired businesses is then gathered 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. That process has been accelerated by the recent announcement of a sale of most of its industrial businesses, including its process technologies and measurement and analytics businesses.
Roper will now report its operations via three segments: application software, network software, and technology-enabled products. The portfolio of businesses includes such niches as business management software for law firms, software solutions for the commercial construction industry, and automated meter reading technology, among many others.
All this means investors should think of Roper as primarily a software company, and once the market recognizes that fact, a valuation re-rating could result. It’d make sense to savvy investors to use traditional software companies as peers for valuation purposes, and Roper looks quite cheap right now, as seen in the chart below.
The security door and locks company currently generates 80% of its revenue from mechanical products, with the remaining 20% from electronic ones. However, it has significant growth potential from the convergence of mechanical and electronic technology and the increasing use of digitally connected solutions using the Internet of Things (IoT).
With digital technology, commercial building owners can better manage, control, and monitor who has access to which area and how long they spend in it. This brings security and productivity benefits to building owners.
Moreover, the current penetration rates of electronic locks in the non-residential and residential markets are low (7% for U.S. residential and 14% for U.S. non-residential), giving Allegion a long pathway of growth ahead of it.
Allegion is not a technology company right now, but its growth potential lies in the growth of digital technology, making its stock worth looking at for tech investors.
Lee Samaha has positions in Honeywell International. The Motley Fool has positions in and recommends Adobe Inc., Autodesk, and Salesforce, Inc. The Motley Fool recommends Roper Technologies and recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy.