Electric grid spending is an ‘overlooked’ opportunity, says Morgan Stanley. Here are the names to buy

Published Wed, Mar 31 202112:57 PM EDT

The proliferation of renewables and the rising use of electric cars will demand further investment in the electric grid – and could create a potential tailwind for several industrial companies, said Morgan Stanley. The firm estimates that the electrical grids in the U.S. and Europe will need an additional infusion of more than $500 billion through 2040, making it an "overlooked" investment opportunity. "The roll-out of renewables + increase of EV adoption is now in full swing. But the success of this Green Transition risks being undermined by current spending plans on the Electrical Grid coming up short," the firm wrote in a recent note to clients. Morgan Stanley anticipates renewables in the U.S. growing to 60% of energy generation by 2040, compared to just 10% in 2019. Electric vehicle market share is slated to grow from effectively 0% in 2019, to 33% by 2040. The firm envisions this translating to additional spending of $535 billion — on top of existing investment plans — across Europe and the U.S. by 2040. Overall, this means the market will grow by about 11% per year. "This Green Transition is underway, and the focus of many governmental/public initiatives has been to support and promote this wave of installation and adoption," the firm said. But adequate investment into transmission and distribution systems is needed to deliver renewable energy to endpoints. The firm's top picks in the space include Eaton Corporation and Prysmian . Siemens Energy and Emerson Electric also stand to benefit. Morgan Stanley's call comes as President Joe Biden unveils his $2 trillion infrastructure plan on Wednesday. A national electric vehicle charging system is one of the key priorities, with the plan calling for at least 500,000 chargers installed across the U.S. by 2030. Biden's "Build Back Better" proposal also earmarks $100 billion to be spent on America's power infrastructure. When it comes to overweight-rated Eaton Corporation, Morgan Stanley said it sees the company as a "key beneficiary of a supercycle of US electrification investment as the grid evolves from a static, distribution model to a dynamic exchange of electricity and data." The firm anticipates a "significant amount of capital" chasing this megatrend in industrial markets. Morgan Stanley has a $155 target on the stock, which is 12% above where shares closed on Tuesday. The firm also pointed to Prysmian as a potential beneficiary. "Despite a leadership position in Electrical Transmission and Telecom, it seems the market has not yet fully grasped the potential of Prysmian on these thematics," Morgan Stanley said of the Italy-based company. Schneider Electric and Emerson Electric should also benefit from increased spending on the electrical grid, although Morgan Stanley has an equal-weight rating on each company. The firm said the former is fairly priced at current levels. When it comes to Emerson Electric, the firm said the current risk versus reward picture looks balanced amid the company's restructuring. - CNBC's Michael Bloom contributed reporting.

A worker wearing a protective mask assembles truck transmissions at the Eaton Corp. manufacturing facility in San Luis Potosi, Mexico, May 27, 2020.

Mauricio Palos | Bloomberg | Getty Images

The firm estimates that the electrical grids in the U.S. and Europe will need an additional infusion of more than $500 billion through 2040, making it an "overlooked" investment opportunity.

"The roll-out of renewables + increase of EV adoption is now in full swing. But the success of this Green Transition risks being undermined by current spending plans on the Electrical Grid coming up short," the firm wrote in a recent note to clients.