Weighing in at 1.37 million pounds each, with tires twice the height of a grown man, Caterpillar’s 797 trucks are a sight to behold. On a recent research trip, members of Capital Group’s investment team watched firsthand as one of the massive trucks hauled tons of material from an oil sand field in northern Canada.
You won’t glimpse one of these behemoths on the road, but many more may soon be rolling off the assembly line, given rising demand for the energy and materials used to build and power our world.
Indeed, many multiyear trends are converging and setting the stage for a capital investment super-cycle. The U.S. is embracing renewable energy, Europe is seeking better energy security, businesses around the world are looking to reshore their supply chains, and global tensions are highlighting the importance of defense spending. The potential benefits include new opportunities for a wide range of industrial companies, lower U.S. energy costs and a boost for American manufacturing.
Of course, not all industrials are equal, nor will all necessarily benefit. The key is to understand which have the most effective innovations, are best positioned to execute on their business plans and have the ability to overcome challenges such as supply chain issues.
“Well-positioned industrial companies, from capital equipment suppliers to aerospace and defense companies, are enablers of these trends, and leading companies across many of these industries may be poised for a period of sustained growth,” says equity analyst Gigi Pardasani, who covers U.S. large-cap industrials.
Growth in green energy has been an investment theme for at least a decade, thanks to the declining cost of renewable power. Last year, renewable energy surpassed coal power in the U.S., with wind, solar and hydropower generating 22% of the country’s electricity.
“People often think about renewable energy in terms of the electric car, but power consumption in factories and businesses is a huge piece of the transition,” says Dominic Phillips, an equity analyst who covers U.S. technology systems, utilities and renewables. “Today, the transition to renewables makes economic sense for energy companies, consumers and the broader U.S. economy.”
But perhaps more transformative is the underappreciated fact that — unlike coal or natural gas — many renewables have essentially zero variable costs, Phillips notes.
“Once you build out the infrastructure, there are only some small maintenance costs attached to it,” he explains. “This could effectively collapse the price of power in the U.S. and provide a major competitive advantage to a wide range of manufacturers.”
Falling power prices could represent a huge productivity jump, according to Pardasani. “Power is the No. 1 fixed-cost input to a manufacturer, to oil and gas extraction, and to metals and mining,” she says. “Paying potentially 90% lower power costs will enable massive productivity and margin gains. I can see ‘made in the USA’ becoming a byword for growth again.”
Europe has been ahead of the U.S. in transitioning to green energy, but the Continent faces challenges in securing oil and gas since Russia has effectively cut off its supply. This renewed focus on energy security is leading many countries to seek sources not tied to unstable regimes.
Liquefied natural gas, or LNG, producers could be clear beneficiaries of this sea change — particularly those based in the U.S., which are among the lowest-cost producers in the world. Cheniere Energy, for example, recently announced it will spend $8 billion over the next three years to expand its massive LNG facility in Corpus Christi, Texas. Today, more than 70% of Cheniere’s supplies are headed for Europe, up from roughly 40% a year ago.
“Many countries have come to realize that their national security depends on stable energy streams,” says Andrew Suzman, a Capital Group equity portfolio manager. “It’s going to have a lot of implications for the energy sector as well as the industrial companies needed to build the infrastructure.”
It’s not just countries seeking greater security. After decades of trying to maximize efficiency and minimize costs, many companies are looking to improve the resilience of their supply chains after experiencing disruptions stemming from COVID-19 and deteriorating China-U.S. relations.
“Manufacturers realized that they needed more resilience, which is to say visibility into their supply chain, the flexibility to change over the types of production and remote monitoring,” Pardasani says. “Resilience also means backup plans in case something happens to the facility, a supplier or employees.”
In December, for example, Taiwan Semiconductor Manufacturing Company disclosed plans to spend $12 billion to build a second chip factory in Arizona, scheduled to be in operation in 2024. The company is also building a semiconductor plant in Japan and has plans to make infrastructure investments in Europe.
Such new construction could have benefits that go beyond localized production resilience. New factories are expensive, and one way to reduce their lifetime cost is to adopt the latest, most efficient technology. That could provide a meaningful boost to established component makers, such as Japan-based Keyence Corporation and SMC.
International tension is also driving an increase in defense spending — a change highlighted most recently by the war in Ukraine. In recent months, several nations, including Germany and Japan, have announced plans to significantly increase their defense budgets.
The U.S. continues to take steps to help its allies in Europe and Asia defend themselves. The Biden administration recently asked Congress for approval to sell $20 billion in F-16 fighter jets to Turkey and sought approval for a similar deal to sell F-35 fighters to Greece. In December, Raytheon Technologies began supplying Ukraine and other European nations with defense equipment.
“In stark contrast to a lot of the gloom in news headlines, I view this as a time for optimism and excitement for industrials, even if there is a recession,” Pardasani says. “Today, many of the best-positioned companies are attractively valued and stand to benefit from a period of strong growth.”
She adds, “For more than a decade, as investors focused on technology and digital consumer businesses, companies often viewed major capital investment initiatives as a negative, but you can’t build the new economy without old industries.”