Industrials Stocks and the Construction Sector Will Profit as Global Warming Forces Rebuilding
United Rentals, Autodesk, Graco, and Watsco are among the beneficiaries of rebuilding, investors say.
More climate disasters are expected around the globe and in the United States, creating growing interest in an array of investments among industrials stocks, the construction sector, and other rebuilding plays. Just for starters, the first half of 2022 saw overall losses of an estimated $65 billion, dominated by weather-related catastrophes like tornados in the U.S., floods in Australia, and extreme heat in Europe, according to reinsurer Munich Re. In the year through July 11, there were nine weather/climate disaster events in the U.S. with losses exceeding $1 billion each, namely severe storms and a drought.
More property damage and rebuilding will be required as the climate grows hotter. The Intergovernmental Panel on Climate Change says that global warming is leading to “an increased frequency and/or intensity of some weather and climate extremes.” These include heatwaves, heavy rainfall, flooding, drought, and an increase in tropical cyclones.
Consider the Texas freeze of 2021, as the Texas grid failed as a result of Winter Storm Uri. The American Society of Civil Engineers estimated the cost could be $300 billion. The damage occurred in the energy grid and across the farm sector, but the freeze also affected buildings as pipes burst and snow and ice sat on rooftops, triggering a burst of spending. After the freeze, one Austin-based Morningstar colleague bought a giant battery to power his refrigerator, an accompanying solar panel, tools to shut off water, and insulation for his doors. “We got a lot more prepared in case it happens again,” he told me.
In addition, the need to slash carbon emissions will affect whole swaths of the building ecosystem, from materials to end product. Nearly 40% of global energy-related carbon emissions come from the existing building stock, related to inefficiencies and other issues, and from new-building construction. Increasingly, regulators will force change. This will create risks and opportunities for an array of players in the construction ecosystem, according to Morningstar senior analyst Grant Slade. For example, the heaviest building materials, including concrete, will have the largest carbon footprints and will face the greatest threats from regulatory intervention.
Slade also cites “deep energy renovation” to reduce the carbon footprints of existing buildings over coming decades, meaning renovation and retrofitting
The Inflation Reduction Act is expected to reduce emissions by 40%. That’s a reason investors are optimistic about industrials and construction stocks. “We look for ways to invest in the renovation of our infrastructure across sectors to reduce the rate and ultimate severity of climate change, including electricity generation and grids, buildings, food production, all forms of mobility,” says portfolio manager Dan Abbasi, who oversees the environment strategy at New York-based Douglass Winthrop Advisors. “There’s an opportunity for [companies] to lower embodied carbon,” or the greenhouse gas emitted in making materials used to construct buildings and infrastructure.
United Rentals URI. The number-one player in the equipment rental space, United rents out heavy equipment used in construction. It’s also a play on the sharing economy. “This is the Uber of heavy-duty equipment,” Abbasi says. United is already benefiting from the 2021 infrastructure law. Climate-related rebuilding will be a new source of demand. A long-term investor, Abbasi believes United will be worth $620 a share, conservatively, in 2031. Morningstar analyst Dawit Woldemariam expects strong rentals to push United’s revenues 18% higher this year as contractors rent equipment to keep up with demand. At $339 per share, United trades right at Woldemariam’s fair value estimate. United has a Morningstar Sustainalytics ESG Risk Rating of Low.
Autodesk ADSK. The leader in architectural engineering software, Autodesk helps reduce waste in the construction process. In addition, “They were leaders in pioneering the formation of the Embodied Carbon in Construction Calculator,” says Abbasi. At least half the carbon footprint of new buildings is from embodied carbon. The construction industry has struggled to measure it. But a recycled steel beam made in a furnace that runs on renewable power will have a different carbon footprint than a virgin-steel beam made in a coal-fired furnace. The new tool helps builders make smarter choices during specs and procurement. This year, Autodesk shares have lagged amid concerns that economic uncertainty will dent revenues. Yet, customers are stubbornly loyal, because software training can take years to master, says Morningstar analyst Julie Bhusal Sharma. At a recent $228, Autodesk trades just below Sharma’s fair value estimate of $230. It has a Low ESG Risk Rating.
Trimble TRMB. Trimble offers hardware and tracking software to boost productivity, such as helping farmers till and spray more precisely. It now offers software that lets utilities and governments focus on infrastructure maintenance and construction. Abbasi thinks Trimble could be worth $165 a share in 2031. At around $70, Trimble trades just below Morningstar Quantitative Fair Value Estimate of $74.58. It has a Low ESG Risk Rating.
Graco GGG makes fluid handling products for contractors, homeowners, and industry. These products include, crucially, paint guns. It also makes guns that blow insulation into walls. “It’s the high efficiency and high quality of their products, built to last, [that attract] tradespeople that need to retrofit and change buildings over time,” says Pablo Berrutti, Sydney-based senior investment specialist at Stewart Investors, which runs a variety of sustainable strategies for global clients. Graco is “a pick-and-shovel company” that will do well in most economic environments, Berrutti says. Morningstar analyst Krzysztof Smalec says Graco has a wide Morningstar Economic Moat Rating, citing its engineering capabilities, reputation for quality, and experience with handling difficult-to-move liquids. Customers are reluctant to switch. At around $71, Graco trades below Smalec’s fair value estimate of $73 a share. It has an ESG Risk Rating of High.
Watsco WSO is the largest distributor of air conditioning, heating, and refrigeration equipment and related parts and supplies in North America. It’s a beneficiary of retrofits, as well as new builds. “It will have tremendous tailwinds,” Berrutti says. Morningstar sector director Brian Bernard boosted his forecast for HVAC shipments to 2.5% annually from 1.9%, thanks to energy efficiency regulations. “We continue to see Watsco outperforming its end markets over the next five years,” Bernard says. Watsco recently fetched $302 a share, above Bernard’s fair value estimate of $199. It has a Medium ESG Risk Rating.
Finally, for investors who want to avoid carbon-policy risk, Morningstar’s Slade notes that the HVAC unit of Carrier CARR will grow strongly, thanks to its commercial focus, while Masco MAS will benefit from repair and modeling in its building products business. Carrier has a Low ESG Risk Rating, and Masco’s rating is Medium. Both are trading below Morningstar’s fair value estimates.
Leslie Norton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.