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The Growing Demand for Electricity Infrastructure

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The utility industry is facing challenges in meeting the increasing demand for electricity due to the rise of data centers, electric vehicles (EVs), and heat pumps. This has resulted in a shortage of crucial components such as transformers and transmission wires.

Shortages of Transformers and Transmission Wires

Builders are experiencing extended lead times for transformers, as reported by David Schulz, CFO at electrical distributor Wesco. The wait to acquire transformers has remained longer than usual, according to CEO John Engel’s remarks during the company’s third-quarter earnings conference call.

Recognizing this pressing issue, the National Association of Home Builders has announced plans to seek $1.2 billion in government funding to boost U.S. transformer production.

Apart from transformers, the sourcing of power lines also poses a challenge. Jason Huang, CEO at TS Conductor, shared that Prysmian, a leading cable producer globally, has a lead time of about 50 weeks for orders. TS Conductor, a start-up specializing in advanced transmission wires designed to carry higher capacity, emphasizes the surging demand.

Prysmian’s backlog of orders has soared to $11 billion from approximately $2.3 billion at the end of 2019.

Implications for the U.S. Electricity Grid

The scarcity of transformers and power lines serves as a warning sign that the United States is not adequately prepared for expanding its electricity grid.

Jason Huang states that despite the industry’s potential to double its capital spending, the supply situation remains tight and does not reflect the increase in capital expenditure yet. This indicates that the current environment presents challenges even before accounting for anticipated growth.

Overall, the demand for electricity is projected to accelerate due to the rapid adoption of EVs and other electric technologies. The Energy Department foresees a yearly expansion of approximately 2.6% in electricity generation capacity over the next 20 years, which is double the growth rate since 1990.

The Growing Business of Electric Utilities

Electric utilities in the U.S. have been investing heavily in maintaining and expanding their capacity. According to the Edison Electric Institute, they have spent an average of $135 billion per year in recent years, and this number is expected to increase to around $170 billion in the next few years.

While companies like Eaton and Hubbell manufacture transformers, the majority of the business in this industry focuses on repairing and replacing existing infrastructure. There hasn’t been much investment in terms of growth so far.

However, the good news is that this is about to change. As the grid expands, companies like Eaton and Prysmian will have a significant opportunity to profit.

In fact, both companies have already been experiencing positive financial growth. Prysmian’s earnings have increased by an impressive 57% per year over the past three years, including estimated fourth-quarter earnings for 2020 to 2023. Eaton has also seen growth, with earnings increasing at an average rate of 29% per year during that period.

Analysts predict that Prysmian’s earnings will continue to rise at a rate of about 5% per year over the next three years, while Eaton is projected to achieve an average annual earnings growth of 9% during the same period, according to FactSet.

Although Wall Street expects earnings growth to slow down for both companies, it doesn’t necessarily indicate that they have reached their peak. Analysts tend to forecast conservative results and avoid assuming that good times will last forever.

Both Eaton and Prysmian are popular stocks among analysts. Around 64% of analysts covering Eaton rate the shares as Buy, while 71% of analysts covering Prysmian shares also rate them as Buy. This is higher than the average Buy-rating ratio for stocks in the S&P 500, which is approximately 55%.

One of the reasons analysts are optimistic about these stocks is that supplying parts to the electrical grid is once again becoming a growth business.

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