Get in the next phase of AI broadening out in industrials, says Citi's Drew Pettit

Joining us now to break it all down, City’s Director of U.S. equity Strategy Drew Pettit. Drew, welcome. You know, yellow flag for me here because there are a lot of companies, almost every company talking about having an AI play, but many of them probably don’t have real ones. So as you try to broaden out, how do you avoid getting tripped up in that truth? So from RC, we’re going to rely on our fundamental analysts here. I get the game some of the C suites are playing right now. Let’s see how many times I can say AI on an earnings call and see if I can get myself a premium multiple. But what we have at Citi is this big tool kit where we have our fundamental analysts tag individual stocks to themes. So I’m just going to go and work under the assumption that these C suites aren’t pulling, you know, the wool over the eyes of our analysts. So number one, I think you need some subjectivity and you have to listen closely and honestly you need some human intervention to see who’s a real user of AI. Is it being a user of AI? Is it companies that actually have the data to develop proprietary models that will allow them to get the benefit from AI more quickly. So I think that’s the obvious trade. You know, not to be too blunt here, but we see that in a lot of stock prices right now. We see in video ripping, we see Amazon ripping. Google had a really good good 2023, struggling a touch in 2024, but really we recognize those trades markets see that analysts see that near term fundamentals. It’s the next leg of who’s not the obvious beneficiary that I don’t think markets are quite there yet. So that’s why we’re saying get ahead of the next leg of the trade in AI which is going to be broadened out and couple some of the users, the industrial space that is going to use AI to make their businesses better with some of the obvious near term beneficiaries. OK. So let’s name some names here, especially since you break this down as users recommended for growth investors and users recommended for value investors. Yeah, so a couple names I’ll get into here. So on the value side, SSNC, so ticker SNNC say that five times fast. It’s an interesting kind of Fintech IT services play. We have them labeled as an enabler actually because they’re packaging some software and reselling it to companies that can use AI and automation to help their processes. But they too, if you listen to their C-Suite are talking about how they can integrate some of that technology. So for their next leg of growth, they don’t need to go out and hire. It’s going to create a better margin profile for this stock and it’s one of our one of the names that’s not just listed in this note, but on our thematic 30 focus list as well. OK. What got my attention here is that there are a couple names that appear on both of your lists and they’re, they’re both industrial names. They’re both specifically aerospace and defense, which I happen to know from all of my reporting have been early adopters of machine learning and AI capabilities and are certainly investing in and expanding on those possibilities as well. So, so walk me through how you’re thinking about Northrop Grumman, RTX and some of these other industrial place. So it’s actually twofold on the user side #1, they’re taking AI and technology and integrating it into products. So the way I think about this broadly in the industrial spaces, no one really said sells a widget anymore. They sell a smart widget. And when you do that, you can increase selling prices and again, give your end customer a little bit of a better product. So that’s step one. So that helps in margins, that helps improve your business profile, your fundamentals. And then #2, these are big manufacturing companies. There is a lot of complexity there. And I think what we don’t give them credit for is, yes, they’re always trying to make consistent improvement. And then when you’re trying to use machine learning and AI technology in the background to help sort out supply and demand, you can find more efficiencies in your manufacturing process. So AI technology, integrating a lot of this helps on the top line on the selling price and on the bottom line in the cost structure. And that’s why we’re really, really cyclical bulls on the fundamental story for a lot of these types of industrials. OK, OK. Drew Pettit of City, thanks for joining us.