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The two big trends for the rest of the decade will be artificial intelligence and electrification.
Behind both megatrends? Electricity… and lots of it.
In fact, electricity demand in the US is growing at a rate not seen in 20 years. According to Goldman Sachs (NYSE:GS)U.S. electricity demand will grow at an annual rate of 2.4% by the end of this decade. Although that doesn’t sound like much, keep in mind that the demand for electricity has grown over the past decade zero.
That growth will require some $50 billion in investments in new energy production, not to mention billions more in connecting these energy sources to the electricity grid. This huge investment should more than benefit the next three stocks.
Quanta services
Quanta services (NYSE: PWR) is a provider of total solutions for electricity infrastructure, including design, construction and recurring maintenance and repair. The company serves the traditional electricity, renewable energy and underground infrastructure sectors.
Quanta is a giant in the industry, with revenues of $44 billion market capitalization and $22 billion in revenue over the last twelve months. But despite its already large size, growth has been solid, especially since the passage of major infrastructure bills under the Biden administration in 2021 and 2022. free cash flow has increased with the scale, to about $1.5 billion.
PWR turnover (annual annual growth rate) data Ygraphs
Quanta has also grown through acquisitions, the most recent being the purchase of Cupertino Electric Inc. (CEI). CEI has a particular specialty in modular electrical systems for data centers and has a particularly close relationship with the technology industry.
Given that AI data centers will have to contribute 0.9% of the 2.4% growth in electricity demand until 2030, the largest contribution to growth, this seems like a smart purchase from Quanta, giving the company access to the fastest growing part of the market.
Emcor Group
The Emcor Group (NYSE: EME) performs design, construction and maintenance services like Quanta, but is slightly more diversified and operates both within and outside the electricity sector. The electric segment is undoubtedly large. Emcor’s electrical division not only handles energy generation and distribution, but also installs solar panels and electric charging stations, and supplies electrical systems such as lighting and control automation to end customers.
Emcor serves other industries outside of the electric power sector, which also have the tailwinds, thanks to the public-private investments spurred by the Bipartisan Infrastructure Act of 2021. These include installing manufacturing facilities, data centers, communications infrastructure, warehouses, roads and traffic control, chemical and refining plants, water and wastewater systems and others.
In addition, Emcor performs ongoing maintenance on all these projects, with services representing approximately 30% of revenue, leading to relatively stable revenue and profit growth.
Like Quanta, Emcor has had an excellent few years with low growth and rising free cash flow, which just topped $1 billion in the last twelve months. Turnover even accelerated to more than 20% growth last quarter.
At just 25 times trailing earnings and 20 times cash flow, Emcor’s stock isn’t expensive for a company that’s growing so quickly and expanding margins. So analysts seem to think that growth will slow down in the coming years.
But with AI and electrification expansions still underway, stimulus measures still flowing through the economy, and interest rates starting to fall, it’s entirely possible that Emcor maintains better-than-expected growth.
American Superconductor Corp.
American Superconductor Corp. (NASDAQ: AMSC) is a small-cap electrical systems player, with a market capitalization of just $920 million today. But the company is growing quickly, with revenue up about 33% last quarter.
For the electricity grid, AMSC makes energy systems, voltage regulation equipment, transformers, fast switching equipment and other systems that make the interconnections between the electricity grid more efficient. The equipment is installed both at the power source and through the distribution and transmission system.
American Superconductor’s secret sauce is its knowledge of new materials. The company pioneered the use of yttrium barium copper oxide to make its high-temperature superconductors. This material can conduct more electricity than traditional copper or aluminum wire, with minimal power loss. AMSC combines its equipment with complete software and management systems and offers turnkey solutions for energy producers and network operators around the world.
In addition to solutions for the electricity grid, AMSC also has wind energy solutions and turbine designs that it licenses to operators.
Finally, as a testament to its technological process, AMSC sells energy solutions to the US Navy. A particularly interesting technology is degaussing systems, which lower a ship’s magnetic signature, allowing naval vessels to avoid detection by mines at sea.
AMSC has just further strengthened its military operations with the recent acquisition of NWL, which provides power supplies and controls to military and industrial customers. AMSC paid only about one times revenue for NWL and is likely to gain significant synergies from the deal.
With strong revenue growth and operating income close to breakeven, AMSC is a small-cap electricity stock that could do exciting things in the future.
Should you invest $1,000 in Quanta Services now?
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Billy Duberstein and/or his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Goldman Sachs Group. The Motley Fool has one disclosure policy.
Demand for electricity in the US is exploding: three stocks are experiencing monster growth was originally published by The Motley Fool