Globalization, resource competition and the social imperative towards greater environmental stewardship are transforming our economies.

At the same time, accelerating complexity, mobility and interconnectivity contrast with aged or undeveloped infrastructure and obsolete regulation. Where industrial best practices and information technologies meet to achieve higher productivities, what we dub Efficiency 3.0, how we make, move and utilize power can be optimized. Similar to Efficiency 2.0, where silicon chips and fiber transformed industrial age economies, we estimate the broader Efficiency 3.0 theme provides long term investment opportunities. By overlaying intelligence to all economic sectors, particularly power, waste becomes a resource, propelling meaningful economic advance.

 

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Strategic Focus:  Every sector but Financials exhibits a post-peak decline in operating and profit margins, with the cyclical peaks. Consensus is that forward earnings multiples are reasonable, but this assumes that current profits are representative of future levels. They are in fact quite high, making forward earnings multiples relative to declining earnings liable to move sharply higher. On a long-term CPI-adjusted basis (Shiller’s CAPE), the market’s PE is very high (>24x). Since the shareholder’s claim is on a company’s long-term future cash flows, not next quarter’s EPS, we face an emerging problem; below-average capital investment. If the corporate sector continues to underinvest, its productivity, cash flows and EPS will begin to suffer. From this, we conclude that investments in efficiency, particularly energy efficiency, have an important long-term driver.

Efficiency 3.0