By: Evie Liu
he Biden administration recently pledged to cut U.S. greenhouse gas emissions to half of their 2005 levels by 2030, while global corporations set their own decarbonization goals in an effort to fight climate change. As the movement to lower carbon emissions continues to gain political and legislative support, investors will likely see growing demand for renewable energy solutions and transformative low-carbon technologies.
Companies that can most efficiently decarbonize the economy will likely see strong growth for decades to come, wrote Morgan Stanley analysts in a Friday note. The group identified five industries and representative stocks that could benefit from the development.
First up: the clean-energy sector, whose stocks have retreated from their recent highs and offer a buying opportunity for long-term investors. The Morgan Stanley analysts prefer clean-energy stocks with strong entry barriers and cash flows. One of their favorites is San Francisco-based Sunrun (ticker: RUN), a “best-in-class” rooftop solar and carbon storage developer that is already generating nearly $1 billion in annual revenue by selling residential solar energy systems and related products and services. The growing gap between rising utility costs and falling costs for solar energy would serve as another tailwind, they argue.
Sunrun stock soared from just $14 a share at the beginning of 2020 to nearly $100 by early January 2021, but has since fallen back to $55.69 as of Friday. The company’s sales are expected to grow by 50% in fiscal 2021, but positive earnings are still out of reach.
The electric-vehicles market also has huge growth potential, the Morgan Stanley analysts say, since the traditional auto industry has been a significant source of carbon emissions. They expect to see multi-trillion-dollar investments to create sustainable high-tech transportation and a speedup in EV adoption. They believe that Aptiv (APTV), a significant supplier of EV components and raw materials for batteries, could be a good play in the space.
Aptiv stock has risen 131% over the past 12 months, but its growth potential is still underappreciated, the analysts wrote. Aptiv is expected to increase its earnings by 92% in 2021, and then another 36% in 2022. That means the stock is currently trading at 39 times 2021 earnings and 29 times 2022 earnings.
The note also looked at the heating, ventilation, and air conditioning, or HVAC, industry. These businesses have taken the lead in setting decarbonization goals, thanks to technology enhancements that could generate greater energy efficiency and higher paybacks for customers. The Morgan Stanley team predicts that high-efficiency HVAC systems could more than double the industry’s total addressable market over the next 15 years. Johnson Controls (JCI) is the group’s favorite pick.
Investors might be surprised to see utility giant American Electric Power (AEP) and energy behemoth Occidental Petroleum (OXY) rounding out the list. In February, American Electric Power announced its target to cut carbon emissions by 80% from 2000 levels by 2030 and achieve net-zero emissions by 2050. Occidental Petroleum, meanwhile, is among the energy companies that have begun to more aggressively decarbonize their businesses and support underinvested areas of low-carbon technologies. These include hydrogen, renewable fuels, and carbon capture—the last of which, the Morgan Stanley analysts say, could have a $225 billion addressable market by 2050.
Occidental Petroleum stock has been on a downward path for most of the past decade, while American Electric Power shares are trading 16% below their latest peak, reached last February. Since the market cares more about the rate of change than the absolute level of carbon emissions, the analysts wrote, these stocks—with cheap valuation and aggressive emission-cut goals—might be well-positioned for a decarbonization rally.