Getting our heads around large numbers can be hard. Few of us can comprehend the true scale of difference between a million, a billion and a trillion. But the events of recent months in the US may give us an incentive us to try.
President Joe Biden has succeeded in passing three important acts that are said to be as monumental as Franklin D Roosevelt’s New Deal in the 1930s. The oddly named US Inflation Reduction Act (which carries the unfortunate acronym IRA and has nothing to do with either terrorism or inflation), the Bipartisan Infrastructure Law and the Chips and Science Act aim to tackle climate change, build critical infrastructure and boost domestic production of semiconductors.
What is significant is how much capital the US government is putting behind these acts. It is not merely big. It is huge — $2tn. That is 12 noughts. Measures in the IRA to support climate change initiatives alone are worth about $400bn over 10 years.
According to Warren Buffett’s latest shareholder letter, a stack of $1bn in $100 notes would reach three quarters of a mile. Pile up what the US will invest in tackling climate change each year for the next decade and you have 10 towers of $100 “bills” — each 30 miles high.
The way these bills will be handed out is roughly as follows: you invest in or make something that lowers carbon emissions, and — providing the kit is made in America — you get tax back. It therefore benefits US manufacturers over importers. It should benefit smart investors, too.
Of course, the politics may change after next year’s election. Many Republicans say the IRA is too large and wasteful. And it may transpire that the numbers have been exaggerated anyway. Who would have thought politicians capable of this?
The experience of Obamacare, however, suggests that the guts of the legislation will survive a Republican presidency and that the final amount spent, even if not as huge as promised, should still be very large. So, how to invest?
Installing utility-scale solar power is already the cheapest source of energy. Since last summer, shares in the largest US solar stock, First Solar, have risen 350 per cent from about $60 to $210. I apologise for not mentioning the stock sooner. It joins the long list of great investments I have watched work over the years without owning — a habit I hope to get out of. We have just bought some on a modest dip.
There are, however, other US companies that might benefit from the IRA. Array Technologies makes systems that help panels on solar farms track the changing position of the sun to boost energy gains. Quanta Services builds, maintains and improves electricity grids. Engineering company Cummins is working on electrolysers to develop green hydrogen.
Other parts of the IRA act encourage carbon capture and storage. Denbury owns a large pipeline network that could be used to take carbon dioxide to suitable storage reservoirs. Such reservoirs turn out to be scarce, though empty North Sea gasfields are often considered suitable in the waters around the UK. Generally, claims that CCS can be a large-scale solution to carbon emissions from global steel and cement production appear ambitious. I would invest in this area with caution.
The IRA also includes tax credits to capture methane emissions from landfill. Waste Management seems to be speeding up opening new landfill sites on the basis of this tax break, and the plan should also benefit environmental waste business Clean Harbors.
The companies likely to make most from this boom will be those that benefit from barriers to entry. Others will face raised competition as a range of companies try to win share. We have seen this with oil majors entering the European wind farm market and driving down returns, resulting in significant share price falls in stocks such as Ørsted — seemingly the leader in a “boom” sector supported by EU green investment.
First Solar claims such a competitive advantage. Over the past decade it has developed solar panels based on cadmium telluride, simplifying the manufacturing process and using cheaper semiconductor material. The boom in orders has allowed the company to raise prices, though current (pretty high) margins may fall as volumes increase.
American investors have focused on US-listed companies that benefit from the IRA, and many of their shares have already risen. The tax breaks, however, also cover US subsidiaries of overseas companies.
Toyota (trading on 10.5 times earnings) is planning to convert its Kentucky car plant to electric vehicle production, rolling out 200,000 cars a year, including the “beyond zero” bZ4X — its all-electric successor to the famous hybrid, Prius, which is no longer made. Each car built in the US will attract a $7,500 subsidy from the US government.
The Japanese automaker is also to build a new battery plant in the US in a tie-up with Panasonic. The $3.8bn plant in Liberty, North Carolina, has $315mn of help from the state government.
Panasonic, also listed in Japan, is already one of the largest makers of batteries in the US, with plants in Kansas and Nevada. Among its customers is Tesla on a staggering 53 times earnings, despite the growing competition. If Tesla loses share to other EV makers, then Panasonic is well placed to cope, as it is likely to end up supplying them instead. Meanwhile, as renewables take a greater share of US electricity production, it may find itself supplying the batteries needed to stabilise supply through the grid.
We own Panasonic, as well as Siemens and Schneider — European electrical equipment makers with strong US businesses that are enjoying the boom. Again, being listed in Europe rather than the US, their valuations are more modest: both 17x.
The lowest-risk strategy in a gold rush is to buy the hardware store selling shovels and buckets to prospectors. First Solar seems to have struck gold, but maybe these European and Japanese stocks will enjoy a very large boom in sales of their shovels.
Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and the Artemis Global Select Fund
Climate Capital
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