From plastic infested oceans to choking cities, humanity must overcome many challenges if future generations are to inherit a healthy planet. Fortunately, we are now seeing dynamic companies take a leading role in developing solutions to the problems plaguing our planet. This is creating opportunities for investors to unearth differentiated alpha generators that are simultaneously affecting positive change. Below, I look across five key themes to uncover innovative companies driving sustainable returns.
POWERING THE PLASTICS REVOLUTION
The world generates about 3.5 million tonnes of solid waste a day, and plastic pollution, in particular, has become a serious threat to the environment. Headquartered in the US, Mohawk Industries designs, manufactures, sources, distributes and markets flooring products designed to reuse this wasteful material. Mohawk is one of the largest recyclers of PET bottles in the US, turning them into their soft, long-lasting and easy to clean Everstrand® carpets – 14,000 plastic bottles become Everstrand® carpet every minute.
Ultimately, a linear economy, one where we take materials and make and dispose of products, is less desirable in a world with a growing population and fast depleting resources. We need to transition to a circular economy, in which business models such as Mohawk’s are capable of reducing waste from the system. What was previously considered waste becomes a resource and an opportunity, and resource efficiency is at the heart of the circular economy model.
Utilising waste as an input reduces dependency on commodity prices, enabling less volatility from a cost perspective through cycle which should manifest as greater margin stability. In the short term, Mohawk has been hurt by the US – China trade tariff escalation, while US interest rate hikes have also subdued new home sales which accounts for around 20% of sales for Mohawk. Based on 2020 earnings estimates, Mohawk trades on an attractive 11x PE.
GENETICS IS TRANSFORMING TREATMENT
Genetics is a growing area of research, fuelled by scientific and technological advancement, that offers great promise in decoding difficult to treat diseases. Genome sequencing, which determines an organism’s complete DNA sequence, is the engine for genetic discovery. While the first full genome took years and cost billions to sequence; now it can cost less than $1,000 and takes a day. IP commercialisation companies are a good way to access early-stage companies in this market by spreading the risk profile.
Oxford Nanopore, the largest holding of IP Group, has a niche position in the market, renowned for producing inexpensive portable sequencers, which use a different underlying technology than peers and can read in real time. The devices are ideal for infield sequencing research and were used in the 2014-2016 Ebola outbreak in West Africa, with results able to be generated within 24 hours. Other uses for these devices could include biometric security, food safety and superbug detection. IP Group trades on an attractive valuation of 0.8x tangible net asset value per share.
Dynamic companies are now taking a leading role in developing solutions to the problems plaguing our planet
FEEDING A CLEANER ENVIROMENT
Consumers have become increasingly aware of their own food consumption and the methods involved with its production. Koninklijke DSM N.V. (DSM) is a Dutch-based multinational life and materials sciences company which targets product solutions that make people, animals and the environment healthier by creating nutritional additives and alternative sustainable materials. It presents a highly innovative pipeline of solutions, including feed additive that reduces methane production in cattle by nearly a third, ‘Dyneema’, a fibre 14 times stronger than steel, and resin which produces lower Volatile Organic Compounds, or air pollutants, than traditional coating materials.
The company benefits from the rise of sustainable and environmental promoting policies. Moreover, as a global operator, DSM benefits from scale and positioning across the ingredients chain and as such offers competitive pricing. Despite operating in highly competitive markets, DSM is the market leader in most segments, including nutritional ingredients, bio-ingredients for food and beverage, coatings and high-strength fibres. On 2020 earnings, DSM trades on an attractive valuation of 16x.
THIRST FOR INNOVATION
The World Bank estimate to avoid the spread of hunger agricultural output needs to increase by 50% by 2050 to feed 9 billion people, while land available for food production depletes by approximately 10 million hectares per year. In order to address this challenge, while also minimising its impact on climate change, the agricultural industry needs to innovate. This is beginning to happen through companies like Trimble, which is harnessing technology such as big-data analytics, artificial intelligence and automation to improve crop yields and minimise water usage on farmland. The US Department of Agriculture estimates agriculture uses 80% of the nation’s consumptive water, while the World Bank estimate South Asia freshwater share is over 91%. The World Bank also forecast a 15% increase in water withdrawals is required to meet the 2050 challenge of feeding 9 billion – we would consider this optimistic.
Trimble provides integrated software solutions that increase safety, operational efficiency, asset productivity and regulatory compliance for companies in the construction, engineering, agricultural and transport industries – which remain some of the least digitalised. Trimble's scale and scope is almost unrivalled by a fragmented list of competitors. Moreover, the company is pursuing a $50bn total addressable market relative to $2.7bn in annual sales in 2017, illustrating there is still plenty of room for growth. On adjusted 2020 earnings, Trimble trades on c.17x P/E.
THE FUTURE OF TRANSPORT
The transport sector is responsible for road accidents (WHO estimate 1.35 million people die each year and between 20-50 million suffer injuries, premature deaths from outdoor pollution (road transportation share of global GHG emissions is estimated at around 12%) and lower productivity due to traffic congestion. With 75% of the global population residing on 3% of the world’s land, much needs to change to ensure access to essential services in a sustainable manner. In response, the automotive and industrial sectors are rapidly incorporating greater levels of technology to improve efficiency, reliability and safety.
The magnitude of changes will require new architectures, which should drive market growth across global auto parts company Aptiv’s product portfolio, focused on hardware, software, integration, power distribution and data analytics. This includes centralised computing platforms for active safety and self-driving capabilities and the in-vehicle user experience – through components such as weather-proof radars and smart cameras. Next-generation power distribution networks to handle the exponential increase in computing power, data speeds and analytics are also a central feature of Aptiv’s offering. The company’s ability to integrate the hardware, software and data analytics into a complete system is a meaningful competitive advantage. In terms of valuation, on 2020 earnings, Aptiv trades around 13.5x P/E.