Plugging into the electrification supercycle
Insights from Morgan Stanley Research08/09/21
Summary: What’s another way to play compelling electrification themes, such as electric cars, modern energy grids, storage, and distributed power? A unique take for investors.
Electric vehicles, the energy transition, grid modernization, and distributed power are already popular investment themes, and deservedly so. What the market may not fully appreciate, however, is that each of these initiatives require infrastructure powered by a single sector—electrical equipment.
“Electrification could be one of the biggest growth opportunities in the industrial economy, considering the number of areas that will need to be developed, expanded, or modernized," says Joshua Pokrzywinski, equity analyst for Morgan Stanley Research who covers the electrical sector and multi-industry names.
The market for electrical gear not only offers a potential way to play multiple investment trends at once, it’s also poised to benefit from incremental growth on top of an already solid base. All told, Morgan Stanley Research analysts believe that the sector has a 20-year runway for 5-6% compound annual growth, nearly double historical industry rates.
Source: Morgan Stanley Research
An overdue cycle
Thomas Edison's former assistant, Samuel Insull, is credited with doing for modern electricity what Henry Ford did for manufacturing. He used economies of scale to help make electricity accessible and affordable for the masses, beginning in the early 20th century.
Improvements have come steadily—but slowly—over the past century, driven primarily by new construction and remodeling. “It’s tough to point to any meaningful upgrade cycles in recent history," says Pokrzywinski.
Now, with several new electrification themes converging, residential, commercial, and municipal markets will need to revamp their outdated systems in order to charge EVs, store solar energy, and modernize power grids. Retrofits on an “otherwise untouched installed base" represent significant incremental demand, says Pokrzywinski.
Equipment is a pick-and-shovel play
The electrification theme encompasses many trends, each with the potential to transform their respective industries—and electrical markets offer an avenue for accessing all of them, potentially at lower risk. In other words, the companies selling the underlying equipment—a figurative “pick-and-shovel” play—may represent a broader opportunity than any one technology or company.
“We are confident in the long-term trends around energy transition, but the adoption of individual technologies can happen at a different pace," says Pokrzywinski.
For example, growth related to EV charging is expected to surpass $15 billion by 2030, at which point 8% of US vehicles on the road could be electric. As EVs become the predominant vehicle—expected by 2045 in the US—spending on chargers and electrical upgrades will continue to accelerate.
Onsite power generation and storage also drives electrical markets demand. In fact, solar power continues to be one of the largest contributors to new electricity generation capacity, not only for utilities but onsite at residential and nonresidential buildings as well. Add transmission and distribution (T&D) to the equation, and electrification could represent a $45 billion market opportunity by 2030.
Given significant growth is expected in some areas of the market—such as EV chargers, battery storage, and solar panels—industry margins for those technologies could be volatile as scale and share evolve.
Still, for investors looking to plug into electrification themes, the equipment makers powering these rapidly evolving industries may help broaden exposure.
The source of this Morgan Stanley article, Plugging into the electrification supercycle, was originally published on July 29, 2021.
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