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By Jason Stipp | 03-16-2011 12:41 PM

Weighing the Industry Impacts from the Japan Disasters

Morningstar's Adam Fleck highlights the possible business impact on the utilities, energy, auto, and construction sectors.

Jason Stipp: I am Jason Stipp for Morningstar. We've all been carefully monitoring the profound human impact of the natural disasters in Japan. Morningstar analysts have also been carefully examining the potential business and industry impacts from the events overseas.

Here with me to talk about some of those findings is Adam Fleck. He is an associate director of research in Morningstar's equity research team. Thanks for joining me, Adam.

Adam Fleck: Thanks for having me, Jason.

Stipp: There are several different industry areas that could potentially be affected here. I think the one that's top of mind for a lot of market watchers right now is the nuclear space. Obviously, situation is still unfolding and is very worrisome in Japan, but I wanted to discuss with you what you're thinking about the future for this particular industry and the different sub-industries that participate there, starting first with utilities.

So I know that there have been talk of a nuclear renaissance before this that has a cloud over it certainly now. How are you thinking about utilities, given the events that have unfolded in Japan now?

Fleck: Sure, I think the nuclear renaissance is something we have been monitoring very closely, but nonetheless I think right now what we're facing on the utility side is increased cost--potentially increased licensing cost, increased safety cost, and uncertainty regarding the feasibility of nuclear, not only here in the U.S., but in large growth markets like China, for instance. China doesn't necessarily always follow public opinion, but nonetheless, the increased cost and engineering behind that could definitely impact the market there as well.

There are several companies here, such as Exelon, that already have nuclear plants in place; those don't look to be jeopardized, but a company like Entergy, which has been hit because of its negotiations with the Vermont state government could be an area where you could see some tailing off of nuclear.

Stipp: So certainly company-by-company the impact could be different depending on the situation there.

Another area in this space is the engineering and construction firms that help to plan, design and build these plants. How are you thinking about those companies in light of these events?

Fleck: Well, again, it's certainly going to crimp their market potential. A company like Shaw Group, which is very heavily exposed to the nuclear markets, could see some weakness in demand, and again the uncertainty there has beaten down the stock quite a bit.

Stipp: The last one I know that you guys have looked at are the providers of the power equipment. So I know GE stock, when this news came out last week and early this week, took a hit because they had been involved in some of the design of the power equipment that's used in these plants. What are you thinking about these companies?

Fleck: I think it's a less of a negative effect there. GE did take a hit. They helped design the nuclear plant in Japan that's having trouble. Nonetheless, they have come on and said through a press release that they are not on the hook for any liability costs.

In fact, if you look across the space like Alstom, or GE, or someone like that, most of the companies cover the broad spectrum of the electrical grid and the solutions for power, and in fact in a lot of cases nuclear is not even the highest-margin product. So if you see the end of the potential nuclear renaissance and a sentiment change back to more traditional power sources, GE actually might be positively affected by that mixed shift.

Stipp: So following on the discussion of the nuclear--coal could potentially be a beneficiary if we do see less demand for nuclear power in the future. You have somewhat of a differentiated take depending on time frame for coal? Could you explain a little bit of what's behind that?

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