The two big trends for the rest of the decade will be artificial intelligence and electrification.
Behind those two megatrends? Electricity… and a lot of it.
In fact, demand for electricity is growing in the United States at a rate we have not experienced in more than 20 years. According Goldman Sachs (NYSE: GS)US electricity demand will grow at an annualized rate of 2.4% through the end of this decade. While this doesn't seem like much, consider that the growth in electricity demand over the last 10 years has been zero.
That growth will require some $50 billion of investment in new energy production, not to mention billions more to connect these energy sources to the grid. That massive investment should benefit the following three stocks handsomely.
Quantum services
Quantum services (NYSE: PWR) is a complete solutions provider for electrical infrastructure, including design, construction, and recurring maintenance and repair. The company serves the traditional electric power, renewable energy and underground infrastructure industries.
Quanta is an industry giant, with a turnover of $44 billion. market capitalization and $22 billion in trailing-12-month revenue. But despite its already large size, growth has been strong, especially since the passage of big infrastructure bills under the Biden administration in 2021 and 2022. Meanwhile, free cash flow has increased with scale, reaching approximately $1.5 billion.
PWR Revenue (YoY Growth) data for Y Charts
Quanta has also been growing through acquisitions, the most recent being the purchase of Cupertino Electric Inc. (CEI). CEI has a particular specialty in modular data center electrical systems and has a particularly close relationship with the technology industry.
Given that AI data centers are supposed to contribute 0.9% of the 2.4% electric power demand growth through 2030, the largest contributor to growth, this looks like a smart buy by Quanta, which will allow you to enter the fastest growing part of the market.
Emcor Group
He Emcor Group (NYSE: EME) performs design, construction and maintenance services like Quanta, but is a little more diversified and operates both within and outside the electric power sector. Without a doubt, its electric segment is large. Emcor's electrical division not only handles power generation and distribution, but also installs solar modules and electric charging stations, and provides electrical systems such as lighting and control automation to end customers.
Emcor serves verticals other than electricity that also have tailwinds, thanks to public-private investments spurred by the Bipartisan Infrastructure Act of 2021. These include the installation of manufacturing facilities, data centers, infrastructure communications, warehouses, road and traffic control, chemicals. and refining plants, water and wastewater systems, and others.
Additionally, Emcor performs ongoing maintenance on all of these projects, and services account for about 30% of revenue, leading to relatively stable revenue and profit growth.
Like Quanta, Emcor has had a few excellent years of slow growth and growing free cash flow, which barely topped $1 billion in the last 12 months. Revenue even accelerated last quarter to more than 20% growth.
At just 25 times trailing earnings and 20 times cash flow, Emcor stock isn't expensive for a company growing so quickly and expanding its margins. Analysts therefore seem to think that growth will slow in the coming years.
However, with the development of artificial intelligence and electrification still underway, stimulus still flowing through the economy, and interest rates beginning to fall, it is entirely possible that Emcor will maintain better-than-expected growth.
American Superconducting Corporation.
American Superconducting Corporation. (NASDAQ:AMSC) is a small-cap player in power systems, with a market capitalization of just $920 million today. But the company is growing quickly, with revenue up about 33% last quarter.
For the grid, AMSC manufactures power systems, voltage control equipment, transformers, fast switching equipment and other systems that help make grid interconnections more efficient. Its equipment is installed both at the energy source and through the distribution and transmission system.
American Superconductor's secret ingredient is its knowledge of novel materials. The company pioneered the use of yttrium barium copper oxide to make its high-temperature superconductors. This material is capable of conducting more electricity than traditional copper or aluminum wire, with minimal energy loss. AMSC combines its equipment with comprehensive software and management systems, offering turnkey solutions for power generators and grid operators worldwide.
In addition to grid solutions, AMSC also has wind energy solutions and turbine designs that it licenses to operators.
Finally, as an example of its technological process, AMSC sells energy solutions to the US Navy. One particularly interesting technology is its degaussing systems, which reduce a ship's magnetic signature, allowing warships to avoid detection of mines at sea.
AMSC just further strengthened its military business with the recent acquisition of NWL, which manufactures power supplies and controls for military and industrial customers. AMSC only paid about once for NWL's sales and will likely gain substantial synergies from the deal.
With strong revenue growth and the company's bottom line on the verge of breaking even, AMSC is a small-cap electric stock that could do interesting things in the future.
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Billy Duberstein and/or its clients have no position in any of the stocks mentioned. The Motley Fool has positions in Goldman Sachs Group and recommends it. The Motley Fool has a disclosure policy.
US Electricity Demand Is Soaring: Three Stocks That Will Capitalize on Its Monster Growth was originally published by The Motley Fool