A Play on the Coming Energy Shortage
On Tuesday, Cramer talked in-depth about what he calls the electrical grid of tomorrow, the so-called smart grid. He thinks energy shortages will be a big trend in 2010 and beyond, and he has recommended oil and gas stocks to play it. But there’s another way to invest in energy scarcity and the need to conserve, by buying the companies that help increase energy efficiency and reduce demand for power. That’s exactly what the smart grid does.
Basically, a smart grid technology allows a utility network to manage the delivery of electricity from suppliers to consumers by using two-way digital technology to control appliances at consumers’ homes in order to save energy, reduce your electric bill and increase reliability. The smart grid also uses special transmission lines that limit power loss and includes proprietary technology to monitor the flow of electricity. It could shave about 7% off peak energy demand in the United States by 2019.
Smart grid technology saves the utilities money, and, most importantly for Cramer, is expected to grow to a $200 billion market worldwide by 2015.
“That is huge,” Cramer said, adding that smart grids are about to get a $4 billion boost from the US economic stimulus.
Back on Oct. 19, Cramer recommended Itron as a play on smart electric meters, which has since climbed 27% gain. But today Cramer offered two new smart grid stocks that he thinks are even better, one of them a conservative diversified industrial company and the other a more speculative pick.
The first is Cooper Industries, one of the largest industrials with serious smart-grid exposure. Simply put, Cooper makes it possible for electricity to get to the user from the power plant. For that reason, Cramer thinks this company is the kind of industrial that’s a major benefactor of the recovery with 61% of sales coming from industrial or utility customers.
In terms of the smart grid, Cooper’s products help optimize the grid’s performance—smart readers, smart sensors. The question for a company this large and this diversified though, is whether or not the smart grid is big enough to move the needle. And Cramer thinks it can because 21% of its revenues come from utilities, and that’s increasing. Plus, on its third quarter conference call management said that the smart grid’s been one of Cooper’s growth platforms from “before the term was coined,” and the company’s looking for acquisitions that would boost smart-grid exposure.
CBE is a cheap stock, held down by stalled construction in this country. But Cramer thinks we could see a turnaround in 2010 because it has lowered costs dramatically. Management cut production, closed factories and reduced its inventories in order to deal with the slowdown, and now it’s positioned to earn more money than anyone would have expected at this point in the cycle as demand comes back.
“This could cause an earnings explosion and significant, subsequent jump in price,” Cramer said, such as we saw today with the huge upside surprise from fellow industrial Parker Hannifin.
Cooper estimates that it can earn $3 a share this year on just a 5% increase in volume from 2009, which means this $43 stock is trading at about 14.5 times earning. Cooper also has a strong balance sheet and a history of making smart acquisitions that are additive to earnings.
The bottom line: A safer way to play the smart grid is Cooper Industries, “a huge industrial that’s positioned perfectly for the electricity revolution,” Cramer said.
Cramer’s charitable trust owns Cooper Industries.
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