Global Structured Research Equity

Hi everyone. Thanks so much for joining us today as we provide insight into the work of our research team.

 Today joining me is Bill Ledley, whose coverage includes many of the leading providers of data centre power and utility infrastructure, a key focus of the market today. 

Hi Bill, thanks so much for joining us.

As mentioned, you manage a sleeve of the portfolio focused on the industrial sector and we currently have a somewhat unusual industrial backdrop with parts of the industrial economy slowing while areas related to AI and electrification are accelerating.

How has that divergence shaped how you're allocating capital today?

Sure, Tamzin.

First off, it's important to remember that divergences create opportunities for fundamental investors.

Understanding where companies are and their business cycle is a critical part of my process and informs which stocks I want to own and when.

Over the past few years, we've seen a wide divergence in industrials as sectors with powerful secular tailwinds such as data center, utility and power infrastructure, have strongly outperformed, whereas other sectors of the US industrial economy have suffered through rolling recessions such as ag and construction machinery, electronic test and measurement, industrial automation and housing.

Going forward, I expect those secular tailwinds to remain strong, but I believe it's increasingly important to identify and focus on those companies that are separating themselves from the pack.

In my view, these true winners can develop and deploy differentiated technology capabilities and service at scale.

That said, some industries look poised to return to growth, which is typically a very attractive setup for cyclical stocks.

Within this group, the best opportunities in my view are those companies whose long-term growth opportunities were overly discounted at the bottom of their business cycle.

Thanks Bill.

Let's focus in on what continues to be the biggest theme in markets today, AI and infrastructure.

AI is becoming increasingly capital intensive in the physical world.

From your perspective, where are you seeing the most compelling second order effects of this in industrials?

The most compelling opportunities I see are companies who are increasingly separating themselves from the pack. In an environment where customers are not only starred for compute, but are also struggling to deploy increasingly complicated large and powerful GPU clusters.

Being able to develop and deploy differentiated technology, capability and service at scale will produce outsized earnings growth in my view.

I believe this is true across all facets of data center development, including power, cooling, labor and connectivity, all of which are increasingly constrained by the way.

You’ve highlighted the intensity of power and thermal requirements as rack densities increase.

How does that dynamic change the opportunity set for companies exposed to data center infrastructure?

Data centers are getting bigger, more complex and hotter.

Infrastructure requirements are changing almost daily given the pace of innovation.

As such, suppliers of data center infrastructure have seen large increases in their adjustable market as measured on a dollar per MW basis as legacy systems grow in size and complexity and as new systems get deployed, such as liquid cooling.

As the leading provider of data center power and thermal management systems, Vertiv is exceptionally well positioned for this trend, which is why the company remains a large position.

For me, Vertiv is also an example of a company that is separating itself from the competition through product innovation, manufacturing capabilities, and service footprint.

For instance, the company's ability to integrate pieces of the power and thermal management change into modular design reduces data center complexity and decreases installation time.

Further, Vertiv has established itself as a leading supplier of liquid cooling, giving the company a very attractive growth opportunity as liquid cooling penetration increases globally.

Of course, all this is enabled by Vertiv’s close partnership with NVIDIA, which fosters continued innovation and aligns Vertiv product road map with future customer needs.

Thanks, Bill.

So alongside the physical build out, there's also a layer of increasing complexity in the underlying technology, particularly in these areas like networking, semiconductors and communications.

How are you thinking about companies that are effectively enabling that innovation?

I believe addressing the increasing complexity of data centers and AI infrastructure is a strategic imperative for hyperscalers and their partners.

Every kilowatt of power is precious and decreasing latency of token generation helps differentiate frontier models and improve the user experience.

Further, we are seeing the development of custom ASICS that are designed to handle new AI specific workloads.

All this bodes exceptionally well for Keysight in my view. The company can be viewed as a pick-and-shovel supplier for technical and for technological innovation as the company is the leading supplier of critical electronic tests and measurement equipment for R&D labs and leading edge manufacturing facilities.

The company's growth opportunity looks exceptionally strong over the next three to five years, driven by global defence modernization, increasing semiconductor manufacturing capacity and complexity, accelerating innovation cycles for wired communications such as 800 gig and 1.6 terabit ethernet, autonomous vehicles, and ultimately to the development of 6G wireless.

Furthermore, many of these innovations are increasingly intertwined, such as the need for powerful, secure and precise communication networks that enable the proliferation of autonomous vehicles or the eventual move of AI from the cloud to edge devices.

Thanks Bill. This is just so fascinating.

And in a sense, you're capturing AI from two angles - physical infrastructure and the innovation ecosystem. As that build out accelerates, you know, power availability is becoming a real constraint and increasingly it's about speed to market.

How should investors think about power generation solutions that can accelerate time to power for these data centres?

As I said before Tamzin, every kilowatt of power is valuable right now and the competition to establish the best in class frontier model is pushing up the importance of speed to market or in this case time to power.

In my view, Caterpillar is exceptionally well positioned with its behind-the-meter solutions that enable much faster time to power.

The company's reputation is already best in class with data center operators given the company's leading position in backup generators, and Caterpillar is only building on this reputation.

The company's Solar Turbines franchise has decades of experience delivering prime power for off grid facilities, making their solutions an attractive option for data center developers facing 5 plus year wait times to secure power from the grid.

Caterpillar's ability to provide local market service is also differentiated in my view.

Furthermore, the company's construction machines are being used to build these data centers in addition to a host of other industrial mega projects.

And ultimately, I believe Cat's mining franchise will also be called upon to address the world's growing shortage of copper and other mining materials.

Lastly, Caterpillar is also leading the way for the development and deployment of physical AI.

The company has already embedded AI capabilities for operators to use across all their machines.

The company's global position gives cat head start in designing and innovating novel ways to extend AI to the digital realm and into the physical realm to unlock productivity, improve safety and increase output.

It's so interesting to me how this traditional business is now becoming an AI play.

So one last question to wrap up today, where do you have the highest conviction as things are today and what do you think the market is still underappreciating?

Keysight remains my highest conviction idea, which is why the stock is my largest position.

In my view, the market still doesn't appreciate the strength of Keysight's competitive position, nor does the market fully appreciate the multitude and size of Keysight's opportunities over the next three to five years.

Lastly, the current wave of technological innovations are increasingly intertwined, which creates a fantastic environment for Keysight.

These dynamics coupled with an attractive cyclical starting point make hindsight my highest conviction idea.

Thanks so much Bill for your time today and for sharing these insights.

Of course, thanks for having me.