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Is It Time To Profit From This Billion-Dollar Energy Trend?

David Sterman

Did you know that the United States accounts for just 5% of the world's population, but 20% of global energy demand? The massive amount of power we use every day has a major effect on U.S. trade balances and the global climate. Indeed, the amount of carbon dioxide in the atmosphere recently surpassed 400 parts per million, bringing the climate change issue back in the spotlight as well.

The United States may be poised to curb its growing appetite for power. The Energy Savings and Industrial Competitiveness Act, which is wending its way through Congress, would encourage industrial energy-efficiency upgrades through tax credits and state grant programs, research and development funding and more stringent efficiency standards for new building codes.

Much of this dovetails with President Barack Obama's mid-winter proposal for a $200 million competitive state grant program designed to spur energy-efficiency upgrades at industrial facilities. In fact, a lot of interested parties support the legislation: The U.S. Chamber of Commerce, the National Association of Manufacturers and the Alliance to Save Energy have each expressed their support. Consumer interest groups clearly love the idea. An earlier version of this bill, brought to a Senate sub-committee in 2011, noted the possibility of $23 billion in annual consumer savings by 2030 from the legislation.

Inevitable Change
The move to greater energy efficiency is set to become a worldwide phenomenon.

Merrill Lynch's Sarbjit Nahal, who has been analyzing the issue for a half decade at Merrill Lynch, recently noted that an expansion of the middle class in countries such as China, India and Brazil will boost power demand 30% by 2035, compared to today's levels.

He added that "End-use energy efficiency offers the greatest potential to lower both energy demand and CO2 emissions. It offers considerable low-hanging fruit given that two-thirds of the economic potential to improve energy efficiency remains untapped," citing the International Energy Agency. Nahal concludes that every dollar spent on energy-efficiency enhancements yield $2 to $4 in lifetime annual savings.

As an added bonus, there are ample ways for investors to profit from energy efficiency gains. A wide range of companies would see a spike in demand for their products and services, which explains the bullish view of the legislation from the Business Roundtable.

Investors are already quite familiar with the leading companies in the field of energy-efficiency equipment. For example, take Johnson Controls (JCI). The company, which was already a strong player in the automotive battery market, has made a push into advanced batteries that can power electric cars and hybrid vehicles.

Yet a clear area of focus for JCI is its "building efficiency" segment, which comprises a range of products and services that lower energy costs. For example, the company's new air-conditioning and heating units consume far less power than models just five or 10 years old, leading to a steady aftermarket upgrade business in the commercial construction sector.

In fact, improving the energy efficiency of buildings would be a huge step forward. "Energy consumption within buildings is the single largest component of global energy use and CO2 emissions, at c.40% and c.30%, respectively," noted Nahal. Yet he adds that "little of this has been captured - with 80% of the economic potential of energy efficiency in buildings remaining untapped."

The growth prospects for JCI and other companies will surely strengthen as spending on efficiency continues to ramp up. According to Pike Research, spending on energy efficiency technology in the United States has risen 750% from 2005 to $85 billion in 2012, and is expected to exceed $200 billion by 2016.

In addition to Johnson Controls, both Honeywell (HON) and Ingersoll-Rand (NYSE: IR) stand to generate modest gains from energy-efficiency spending, as the niche represents a portion of their overall sales base. They are surely candidates for further research if you are looking for companies that could profit from rising efficiency spending.

In the next part of this two-part piece, I'll be focusing on companies that can more squarely benefit from the expected spike in energy-efficiency spending.

Risks to Consider: Thanks to fresh scandals involving the Internal Revenue Service, the State Department and snooping around of The Associated Press' phone records, the mood for a bipartisan agreement is again at afresh low, which could imperil this legislation.

Action to Take --> If and when this legislation gets signed into law, look for analysts to boost their sales and profit forecasts for many of these companies. However, treat this as a trading window instead of a long-term investment opportunity, as share prices might quickly capture all of the long-term gains inherent in the legislation.

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