Morgan Stanley highlights 3 stocks to buy that will benefit from the climate bill

All of us have certainly heard about the climate bill, which will provide a very fat financial package that could propel many companies quite high. The climate package will send $369 billion to renewable energy and to reduce emissions. On that basis, banking leader Morgan Stanley has introduced us to his favorites that will thrive under this bill. For all the stocks mentioned, MS is raising the target price in view of stronger growth thanks to the climate bill.

Johnson Controls, one of the companies we're going to break down today.

Morgan Stanley on Thursday raised its earnings estimates and price targets for companies that make heating and cooling systems. The investment bank said tax credits and rebates in the tax and climate bill passed by Congress will help boost sales. The Inflation Reduction Act, which President Biden approved last month, includes incentives for the largest investment in energy-efficient products in U.S. history. The law allocates $21 billion in rebates and federal tax credits to improve energy savings in people's homes over the next 10 years.

The biggest gains for equipment makers will come from households that replace their air conditioners and heating systems with heat pumps, Morgan Stanley analysts said in a report. Heat pumps are all-in-one devices for cooling and heating a home more efficiently.

"Heat pump technology has been steadily improving over the past decade," said one analyst, "and adoption is possible in more regions."

1. Johnson Control $JCI+0.4%

This year, $JCI+0.4% stock is down 30.83%

When I think about construction, many modern homes are increasingly equipped with sophisticated and integrated systems to manage, control and treat the environment. Larger industrial or office buildings often have much more extensive controls. This is where Johnson Controls finds its home with a long history of developing, engineering and installing systems that improve the quality of the built environment. Given the growing need for improvements and time spent inside buildings, especially after the pandemic, $JCI+0.4% will likely continue to ride the wave of increased investment in the built environment.

Morgan Stanley's prediction is: The price target is raised and set at $62, with analysts calculating EPS growth of $3.72 in 2023 and $4.12 in 2024.

3 quick reasons why $JCI+0.4% is a good buy

  1. The company has seen relatively strong business growth. They have a strong backlog of $11.1 billion. The backlog volume is long term and has steadily increased since 2017. The range of business segments they are involved in includes both residential, commercial and industrial buildings and construction. This means that as long as there is economic activity and ongoing construction or retrofitting of buildings, $JCI+0.4% should continue to thrive.
  2. Over the past few years, JCI has been investing heavily in the digital services section of its business. The plan is expected to result in approximately $2 billion in increased revenue by 2024 through greater customer ''lock-in'' based on improved connectivity.
  3. JCI has a strong commitment to improvement and ESG, but I won't go into complex detail. Simply put - they have goals that will be in the interest of improving their quality, but also in the interest and requirements of the state, which will lead to further growth and popularity.

2. Carrier Corporation $CARR-0.6%

This year, $CARR-0.6% stock is down 24.64%

Carrier Global is a leading manufacturer of heating, air conditioning, ventilation, refrigeration, and fire and security products. Its HVAC (heating, ventilation and air conditioning) business serves both residential and commercial markets, and its refrigeration segments serve the core food transportation segment, which is an integral part of the cold storage supply chain.

Morgan Stanley's price target has been raised to $44, and they expect EPS of $2.60 in 2023 and $2.88 in 2024.

Reasons to Buy:

  1. Carrier's strengths include a strong global reach with products in 160 countries, as well as a diversified product portfolio and end markets. In terms of competitive advantages, Carrier has more than 100 years of industry experience, which has enabled it to develop a strong brand and reputation for quality. In addition, Carrier also benefits from its aftermarket business, which provides spare parts and services and accounts for approximately 30% of total revenues (this business is much more profitable than new equipment sales).
  2. Two of Carrier's most significant initiatives include increasing service connection rates and becoming the market leader in applied HVAC within five years.
  3. Meanwhile, $CARR-0.6% maintains a solid balance sheet and pays a dividend yield of 1.6%, which is supported by a low payout ratio of 23%. While the yield is low, management recently announced its intention to use capital for either acquisitions or share buybacks, targeting a 30% payout ratio in 2023, signaling a significant dividend shift.

3. Lennox International $LII+0.1%

This year, $LII+0.1% stock is down 21.72%

Lennox International is a leading global provider of climate management solutions with operations in more than 112 countries worldwide. The company manufactures and sells a wide range of products for the heating, ventilation, air conditioning and refrigeration markets. The company's operations are divided into three business segments. The Residential Heating and Cooling segment, which provides 60% of the Company's net sales , manufactures and sells furnaces, air conditioners, heat pumps, packaged heating and cooling systems, indoor air quality equipment, comfort control products, and replacement parts and supplies. The Commercial Heating and Cooling segment, which provides - 20% of the Company's net sales and manufactures and sells unitary heating and air conditioning equipment, applied systems, controls, installation and service of commercial heating and cooling equipment and commercial variable refrigerant flow products. The Refrigeration segment, which provides 15% of the company's sales and manufactures and sells condensing units, unit coolers, liquid coolers, air-cooled condensers, air handlers, process coolers, controls, and compressor racks.

  • I know this lengthy introduction probably doesn't tell you much if you're not in the industry. I was all about introducing the company's highly diversified portfolio.

Morgan Stanley's prediction: the price target has been raised to $268, and they expect EPS for 2023 to be $15.32 and 2024 to be $17.22.

Reasons to Buy:

  1. The HVAC (heating, ventilation, and cooling) services market is expected to grow at a CAGR of 5.3% globally from 2021 to 2030, indicating that the company operates in a relatively fast-growing market.
  2. The company's net sales have been relatively stable and have tended to increase over the years, and despite being negatively impacted by the coronavirus pandemic in 2020, the company has managed to achieve pre-pandemic sales in 2021.
  3. The company's margins are quite impressive and stable, allowing it to generate large amounts of cash year after year. Over the years, the company has shown that generating positive cash is a recurring part of its operations and something that investors can feel supported by. In this sense, the company has improved its twelve-month gross profit margin from 23% in 2011-2012 to 29% in 2021.

Conclusion

It's clear that with the Climate Change Act, there will be a fat chunk of money floating around that the tip of the iceberg will fight over. The companies mentioned are Morgan Stanley's choice, but partly mine as their list hid multiple names. I'm not saying that the companies named are currently attractively valued (I can still see room for a decline), but investors should still consider whether they will somehow make proper use of this multi-billion dollar package from the US. The named companies certainly offer a number of attractive items and benefits that I have only glanced at marginally (I may analyze them in the future if there is more interest). Basically, I would say that just as I have studied and fact-found this year regarding solar stocks, where I have duly taken advantage of the benefits that the US, for example, has been giving (tariff reductions, rebates, increased support, etc.), I see the same opportunity here. It's hard to say whether this growth will be as strong, but I certainly believe that some of those positive percentages will earn us/us. I see similar potential here currently, but with the difference that I wouldn't rush to buy yet (will depend on market conditions). However, I expect growth in the future and will continue to look for these companies.

Please note that this is not financial advice. Every investment must go through a thorough analysis.

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The company has seen relatively strong business growth. They have a strong backlog of $11.1 billion. The backlog volume is long term and has steadily increased since 2017. The range of business segments they are involved in includes both residential, commercial and industrial buildings and construction. This means that as long as there is economic activity and ongoing construction or retrofitting of buildings, $JCI+0.4% should continue to thrive.

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