A heady mix of cutting edge engineering and technology prowess is fueling the growth of Europe’s industrial giants

Investors are increasingly looking to reap in the benefits of cutting edge industrialization with hi-tech software prowess such as machine learning and artificial intelligence. No wonder, European Companies, including Siemens and ABB, have become a favorite among investors.

Investment funds who are looking to reap rich rewards at the intersection of European efficiency and technology are finding surprisingly rewarding pickings in a wide gamut of industries ranging from turbines to trains.

Engineering groups such as ABB and Siemens, for instance whose strength lie in cutting edge engineering, including automating factories, are now adding high-end cutting-edge software capabilities to their repertoire to help their customers, design, test and build their products not only much faster but cheaper as well.

This rare combination bring new value added benefits to these companies, who have been historically linked customers in the mining, power and energy sectors predominantly. But with these industries facing a technology leap in the last few years, they have faced harsh cost cuts and a precipitous drop in commodity prices.

As a result, these engineering giants have added a new technology element to their basket of skills which in turn has created a trend toward providing a breakup of their earnings in their annual reports allowing investors to see previous hidden value to their operations.

“Your industrial company today is not your dirty factory bending metals and producing simple and large objects,” said Andreas Fruschki, director of equity research, Europe at AllianzGI. “It’s a more high-tech, nimble assembly site.”

These efforts are now increasingly drawing investor attention, as they seek better return on their investment from traditional technology players, including Apple, Facebook, Google, and Netflix due to their uncomfortably sky-high valuations.

As per Neil Campling, head of global TMT research at Northern Trust Capital Markets, growth opportunities in European industrials are still limited by legacy businesses.

“But you’re certainly seeing that factory automation, machine vision, automation, industry 4.0, improvements in supply chain systems, all these kinds of things … (are) enjoying very strong growth,” said Campling.

Case in point: with the introduction of Siemens’ Digital Factory in 2015, which is widely seen as the global leader in industrial software, the German giant has started providing separate results in its final statements.

As a result, investors were able to attribute a 13% rise in its 2016 revenues to its technological prowess. Although this is a small fry compared with its power and energy divisions’ 40% revenue surge, its digital business saw a rise of 11% and accounted for more than a fifth of its total profits.

Siemens’ is not the only European giant drawing investor’s attention, ABB, a Swiss power grids maker is also attracting investors’ eyeballs thanks to advances in its robotic segment.

ABB’s Ability, a digital software and services platform that allows remote monitoring and diagnostics of industrial robots for which the company has partnered with IBM and Microsoft, is starting to pay dividends.

ABB Ability is starting to contribute to the growth of the company, said Ulrich Spiesshofer, at a press release following the release of the company’s results for the second quarter which ended on June 30.

ABB’s Robotics orders have jumped by 12% year-on-year in the quarter to more than 25% of the company’s total.

Incidentally, while some technology assets have been developed in-house or through a collaboration, others have come from acquisitions.

In the last 18 months, Siemens has sunk in more than $5 billion in its bid to gain a steady footing in the industrial software arena and has shed its legacy businesses, including household appliances and hearing aids, as its prepares for the IPO of its healthcare business.

To better challenge Siemens, ABB acquired automation software maker B&R for nearly $2 billion this year.

“The more exciting themes now are themes like automation, and that is definitely one we’ve angled our portfolios towards,” said Tim Crockford, European equities portfolio manager at Hermes.

“Industrial companies with big software businesses generate stronger growth and profitability than their automation peers,” said BAML in a research note last month.

Although the European industrials sector has outperformed the broader MSCI Europe benchmark in the last year, they however have still to reach the heights of tech stocks like semiconductor manufacturers.

“There are no ‘pure’ plays in Europe,” wrote Barclays capital goods analysts in a note.

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