Three Stocks Outperforming the S&P 500 in 2024. These Same Shares Might Excel Once More in 2025.
It's been a stellar year for equities, and one of the top investment themes was the construction and infrastructure sector. Particularly shining stars were companies that employ advanced technologies to enhance their offerings for their clients.
Reasonably, three companies poised to excel in 2025 are positioning and workflow technology firm Trimble (TRMB 1.23%), HVAC building-controls business Johnson Controls (JCI 1.23%), and automation company Emerson Electric (EMR 1.03%).
Trimble's growth momentum escalates
Trimble's strategy revolves around building on its established hardware and incorporating software solutions into its customers' daily operations, making it an indispensable tool. This is particularly advantageous in the infamously intricate infrastructure and construction industries, which plagued by daunting projects frequently lead to substantial delays and expenditures overruns.
Enter Trimble's digital construction management software suite, Construction One. This software enables contractors, subcontractors, engineers, project managers, and project owners to orchestrate, appraise, surveil, and regulate projects using real-world data in real-time. The rapid acceptance of this tool is fueling growth in its primary market, namely the architecture, construction, engineering, and ownership (AECO) segment.
The AECO segment is the primary source of Trimble's current annualized recurring revenue (ARR), accounting for about 55%, and is currently expanding its ARR at a mid-to-high-teen rate. Management views the AECO segment as the driving force behind its long-term outlook for mid-teens ARR growth, resulting in corresponding earnings growth and substantial cash flow generation due to its asset-light business model and a shift in revenue mix towards a higher share of software.
As the digital transformation of the construction and infrastructure industries is just in its infancy, and there's an urgent need for greater transparency, precision, and control in large-scale projects, Trimble has plenty of space for expansion. It remains one of the most promising long-term growth stories in the sector.
Johnson Controls navigates towards long-term growth
Johnson Controls bills itself as a global leader in engineering, manufacturing, commissioning, and retrofitting building products and systems, including residential and commercial HVAC equipment, industrial refrigeration systems, controls, security systems, fire detection systems, and fire-suppression solutions.
Management, however, has set its sights on capturing the commercial-buildings end market, and recently agreed to sell its residential and light commercial HVAC business to Bosch for $8 billion. The deal makes strategic sense and allows management to concentrate on capitalizing on its most significant growth prospect, namely retrofitting commercial buildings with smart products and services to help decrease emissions and significantly improve building energy efficiency.
Just like Trimble, the value amplification comes from the growing adoption of digital technology in Johnson Controls' solutions. The OpenBlue digital software platform integrates artificial intelligence, the Internet of Things (IoT), advanced analytics, and real-time data collation to create smart buildings.
The growth opportunity is substantial given that the buildings and construction sectors account for 37% of global emissions. Furthermore, the divestiture will result in a more focused company and $6.7 billion in proceeds, which management has plans to utilize to reduce annual expenses by $500 million over the next few years. This positive trajectory proves Johnson Controls has promising long-term growth opportunities.
Emerson Electric leads the way in automation
Like Trimble and Johnson Controls, Emerson Electric is leveraging mergers and acquisitions to hone in on its core growth opportunity: automation and associated markets.
Its automation, industrial software, and test & measurement solutions aid clients in optimizing facility operations, making it an essential component of capital investment and construction plans for process, hybrid, and discrete manufacturing plants. Examples include chemical processing plants, tire factories, and automotive plants.
Emerson Electric also has significant growth potential through the increasing adoption of digital technology and industrial software. In this case, it stems from automation and the growing use of intelligent devices, software control systems, and instrumentation, which magnify the benefits of its automation solutions.
The future of manufacturing and logistics relies on automation and smart facilities to cost-effectively reshore production from low-labor-cost countries. In any scenario, the value added by implementing digital technology is substantial, necessitating its consideration in any manufacturing or logistics plant investment.
Although its end markets faced a cyclical slowdown in 2024, Emerson Electric has outperformed due to the underlying trend towards adopting automation in manufacturing, which will only intensify if lower interest rates stimulate investment in 2025.
Are these stocks worth investing in?
Across the board, management has streamlined each company's focus on its core activities and growth opportunities, ultimately rewarding shareholders. Similarly, all three companies will prosper with the increasing adoption of digital technology. This winning combination could assist these companies in outperforming the market in 2025.
In light of Trimble's digital construction management software suite, Construction One, gaining rapid acceptance and fueling its growth in the AECO segment, it presents a compelling long-term investment opportunity due to its mid-teens ARR growth rate and asset-light business model.
Johnson Controls' strategy to focus on the commercial-buildings end market and invest in digital technology through the OpenBlue platform demonstrates promising long-term growth possibilities, particularly considering the substantial growth opportunity in decreasing emissions and improving building energy efficiency.
