The U.S. electric grid is an aging mess, and it can't handle the smart meters and renewable energy that could be the future of energy. But where there are challenges for the country, there are opportunities for investors.
We asked three of our energy contriobutors how to play the country's aging electric infrastructure, and here's what they said.
Travis Hoium (Quanta): If the electric infrastructure is aging, it would make sense that it would need repairs and upgrades more regularly than it used to. That presents an opportunity for a big contractor like Quanta Services (PWR +2.17%), which repairs old electric infrastructure and builds new infrastructure.
In the three months ended June 30, Quanta generated $1.22 billion in revenue and $88.0 million in operating income from the electric power infrastructure business. That's about two-thirds of the company's business. On top of that, it has a $6.3 billion backlog in electrical infrastructure.
PWR Revenue (TTM) data by YCharts.
Quanta has also managed to grow its business nicely as investment in the grid has grown. It has run into some margin pressure of late, but long term, management is bullish on the industry's growth. With shares trading at 12 times next year's earnings estimates, this is a great way to play the boom in electric infrastructure spending in coming decades.
Adam Galas: To take advantage of America's coming infrastructure spending boom, I recommend long-term investors take a look at EMCOR Group Inc (EME +2.38%), which designs, builds, and maintains mechanical and electrical systems for industrial, commercial, and utility customers in the U.S. and the U.K.
There are three reasons I think this stock has a very good chance to continue its 20-year track record of crushing the overall market when it comes to total returns.
EME Total Return Price data by YCharts.
First, EMCOR's management is very good at maximizing profitability in a highly competitive and low-margin business, and generates returns that are far superior to its competitors.
|
Metric |
EMCOR |
Industry Average |
|---|---|---|
|
Operating Margin |
4.3% |
3.8% |
|
Net Margin |
2.6% |
1.3% |
|
Return on Assets |
4.9% |
1.9% |
|
Return on Equity |
11.1% |
4.6% |
|
Debt/Equity |
0.2 |
0.8 |
|
PE Ratio |
16.9 |
29.0 |
Source: Morningstar.
In addition, EMCOR has a much stronger balance sheet than most of its competitors, with a debt/equity ratio four times lower than its competitors.
It also boasts very healthy respective current and quick ratios – measured as short-term assets and liquid assets, respectively, over short-term liabilities – of 1.52, and 1.31, thanks to having $361 million in cash versus $326 million in debt on its balance sheet.
Valuation-wise, Its P/E ratio, while not particularly low, is only half the industry average, which I consider a very fair price for a company of this caliber.
Finally, management is aggressively focused on returning cash to shareholders in the form of large share buybacks. Between September of 2011 and Q2 of 2015, the company repurchased 6.3% of its shares, and has sufficient buyback authorization remaining to buyback another 5.2%. It also pays dividends, which analysts expect to grow at 15% annually during the next five years .
Rich Smith: My colleagues are optimistic about the chances of the federal government getting off its... keister, and getting America's aging electric infrastructure fixed. I am less so.
AMSC Total Return Price data by YCharts.
Fact is, Washington has been talking about the need to upgrade the electric grid for more than a decade -- since back when penny stock American Superconductor was worth several hundred dollars a share more than it sells for today. If you've noticed, Washington is still talking about it today rather than doing anything.
If I were a betting man, I'd put my money on Washington continuing to talk the problem to death for years to come. And I'd put my money on a stock that profits from such government inertia: Honda (HMC 0.09%).
The longer Washington dawdles and delays upgrading the electric grid, the more blackouts, brownouts, and plain vanilla power failures we'll experience. Inconvenienced by these problems, and (rightly) skeptical that the government will do anything to help, people will decide to help themselves, take matters into their own hands, and buy generators.
No matter who you ask, Honda is the top-rated portable generator manufacturer in America right now. Popular Mechanics rates its EU2000i model tops for "toughness," outclassing competing models from Yamaha, Generac, and Briggs & Stratton. Consumer Reports prefers the beefier EU7000is -- but Honda builds that one, too.
Never mind that Honda sells at the highest price points on both surveys. A great reputation permits Honda to command those high prices. Consumers seeking the reliability that Honda offers, and that the electric grid does not, will continue to head to Honda.
