The U.S. seems poised for a manufacturing boom as companies tap into government subsidies, pledging to spend tens of billions of dollars on new projects.
The Chips and Science Act and the Inflation Reduction Act (IRA)—passed within days of each other last August—together include more than $400 billion in tax credits, grants and loans designed to foster a domestic clean technology and semiconductor manufacturing base.
As of mid-April, a number of companies had committed a total of about $204 billion in large-scale projects to boost U.S. semiconductor and clean tech production, promising to create at least 82,000 jobs.
While not all these projects were a direct result of these bills, the projects will probably be eligible for the tax breaks. The amount committed in these projects is almost double the capital spending commitments made in the same sectors in 2021, and nearly 20 times the amount in 2019!
Throw in the Bipartisan Infrastructure Law, and you have something reminiscent of Franklin Roosevelt’s New Deal in the 1930s…except that the sheer numbers are much larger. The U.S. government is putting a whopping $2 trillion behind these acts. Measures in the IRA to support climate change initiatives alone are worth about $400 billion over 10 years.
Two trillion dollars is a huge pile of money. And many companies will benefit from the U.S. government’s incentives.
So, how can you invest to get in on this government gravy train?
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I want to focus in particular on the Inflation Reduction Act.
There are a number of subsectors that will benefit from the IRA, including: carbon capture and storage, green hydrogen manufacturing, methane emissions capture from landfills, electric grids upgrading, and clean energy sources like wind and solar.
One example is the installation of utility-scale solar power, which is already the cheapest source of energy. Since last summer, shares in the largest U.S. solar stock, First Solar (FSLR), have risen more than 350%, from about $60 to a high of $221.88. The shares currently are around $177 per share.
I prefer to look at a stock that hasn’t gone up as much, even though it just hit a 52-week high: Quanta Services (PWR), which builds, maintains and improves electricity grids.
It operates through three segments: Electric Power Infrastructure Solutions, Underground Utility and Infrastructure Solutions, and Renewable Energy Infrastructure Solutions. The Electric Power segment provides network solutions for customers in the electric power industry. The Underground Utility segment provides infrastructure solutions for the development, transportation, distribution, storage, and processing of natural gas, oil, and other products. The Renewable Energy Infrastructure Solutions segment helps to build, maintain, and repair wind, solar, and hydropower generation facilities, as well as battery storage facilities.
Through a combination of organic growth and acquisitions, Quanta has grown into the largest provider of transmission and distribution (T&D) contracting services in the United States, with an approximately 15% and growing market share.
Quanta will benefit from accelerated capital spending by electric and natural gas utilities and from the expansion of 5G services and rural broadband. In addition, the company is well positioned to benefit from the aforementioned $1.2 trillion infrastructure spending bill, which included funds for renewable energy and electric vehicle charging stations, as well as for technology aimed at helping utilities to manage extreme weather conditions.
In July 2022, Quata was selected to be a lead provider in the rollout of a national electric vehicle charging network. The company will provide turnkey engineering, construction, and program management solutions for the project.
It should not come as a great shock, then, that Quanta ended the fourth quarter of 2022 with a record backlog of $24.1 billion.
I expect this backlog to continue to grow substantially. The Inflation Reduction Act will boost spending on climate change programs over the next 10 years, with much of the spending earmarked for power generation.
The company’s acquisition of Blattner Energy in October 2021 should also help it to benefit from accelerated spending on solar and wind projects. Blattner Energy is one of the leading utility-scale renewable energy infrastructure businesses in North America, providing engineering, procurement, and construction services (EPC) for solar, wind, and biomass projects. The company has a market share of approximately 30% for wind and 10% to 15% for solar, positioning it at the top of the renewable EPC industry.
Here is what research firm CFRA said about Quanta Services, which it rates as a strong buy:
Our Strong Buy opinion reflects our view of rising demand for power transmission and electrification projects in the next few years as PWR provides skilled resources and technology. We forecast robust growth from utilities as we think the industry is in the early stages of a multi-decade modernization program to replace aging infrastructure. PWR is well positioned to benefit from federal infrastructure stimulus in the coming years, as significant funding is directed towards grid hardening and modernization project work.
Quanta is actually a defensive growth story thanks to its exposure to both electric transmission and distribution, as well as renewable energy. That will be a positive catalyst for earnings growth even if the broader stock market suffers from declining earnings per share.
Goldman Sachs energy equity research analyst Ati Modak said Quanta is still a “best-in-class equity expression” of companies with exposure to the megatrends in the electric grid modernization and renewable generation markets.
I totally agree, making Quanta a buy. The stock is up about 20% year-to-date and 42% over the past year. Buy PWR anywhere in the $155 to $185 range.
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