Commercial buildings are going green. Here are the names to buy, says Morgan Stanley

Published Tue, Mar 30 20211:01 PM EDT

Commercial buildings are set for an upgrade supercycle to improve energy efficiency, and there are a number of companies that stand to benefit, Morgan Stanley said in a recent note to clients. The firm believes the market is underestimating the sheer opportunity for companies operating in the building retrofit market, as sustainability efforts and supportive legislation fuel upgrades. "We see commercial building modernization as one of the best points of convergence between sustainability and technology in our coverage universe with one of the largest installed bases in the world," Morgan Stanley said. "Technology, [environmental social and governance] awareness, an aging installed base, post-Covid changes, and funding mechanisms are coming together at what we believe are the early stages of a commercial building modernization supercycle in the U.S. and Europe," the firm added. Morgan Stanley estimates that the total addressable market for commercial building HVAC (heating, ventilation and air conditioning) equipment and controls replacement will increase by $140 billion over the next 15 years, creating a $350 billion opportunity. Ultimately, the firm anticipates this leading to more than $325 billion in savings, while cutting carbon emissions by 1.7 gigatons. With this large market opportunity in mind, Morgan Stanley upgraded shares of Johnson Controls International and Carrier Global to overweight, saying each company is well-positioned to take advantage of the growing market. The firm pointed to Carrier Global's new Internet of things and cloud-based building management system, which is set to launch in April, as one of the upside catalysts. "Management appears to recognize where the market is heading while striking a balance of margin improvement and new product development," Morgan Stanley said. "The potential for share gains (i.e., catch up) is fairly high and the company is balanced across other HVAC/building end markets," the firm added. Shares of the Florida-based company have gained 13% this year. Morgan Stanley envisions the stock price rising to $53, which is 25% above where shares closed on Monday. President Joe Biden made building efficiency part of the $2 trillion infrastructure and climate plan he outlined last July. His plan aimed to cut the carbon footprint of buildings in half by 2035. Buildings are a key part of the energy transition since they account for 40% of the United States' total energy consumption, according to the U.S. Energy Information Administration. This translate to more than one third of the country's carbon footprint. Morgan Stanley also sees a large opportunity ahead for Johnson Controls. The bank said the Ireland-based company was slow to invest in building modernization and efficiency over the last five to seven years relative to its high exposure to the sector, but that it's now re-shifting its focus. "We believe the past 12 to 18 months of fundamental performance (orders, operating leverage, earnings, FCF) demonstrate that JCI is starting to catch up," the firm said. "The company's improving operating metrics, high exposure/earnings sensitivity to our modernization thesis and still-undemanding valuation drive an attractive risk/reward in our view," Morgan Stanley added. The firm raised its target on the stock from $52 to $73, which is 21% above where shares closed on Monday. The stock is up 30% for the year. - CNBC's Michael Bloom contributed reporting.

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Commercial buildings are set for an upgrade supercycle to improve energy efficiency, and there are a number of companies that stand to benefit, Morgan Stanley said in a recent note to clients.

The firm believes the market is underestimating the sheer opportunity for companies operating in the building retrofit market, as sustainability efforts and supportive legislation fuel upgrades.

"We see commercial building modernization as one of the best points of convergence between sustainability and technology in our coverage universe with one of the largest installed bases in the world," Morgan Stanley said.

"Technology, [environmental social and governance] awareness, an aging installed base, post-Covid changes, and funding mechanisms are coming together at what we believe are the early stages of a commercial building modernization supercycle in the U.S. and Europe," the firm added.