The Companies That Stand to Win and Lose From the Inflation Reduction Act
First Solar, SunPower poised to benefit. Pharmaceutical companies not expected to see major changes to fair value estimates.
The Inflation Reduction Act, which was signed into law Tuesday afternoon, contains several provisions that affect our stock valuations in the clean energy and the pharmaceutical industries.
To the upside, the provisions that have had the greatest and most immediate impact on our valuations are contained within the nearly $400 billion spending plan to support the development and build out of clean energy. This is the largest federal government spending increase on alternative energy in U.S. history, and its impact is scheduled to last over the next decade.
To the downside, the act contains various measures to lower prescription drug costs which will be a modest to moderate headwind for the pharmaceutical industry.
The new law dramatically increases federal spending on clean energy. According to Brett Castelli, Morningstar’s equity analyst covering the clean energy sector, there are three key takeaways that investors should focus upon:
As such, we forecast that the areas which benefit the most include:
As we incorporate the projected impact of these provisions across our stock coverage universe, we have increased our valuations by up to 20%, or more, depending on the company and its specific product portfolio. Yet, in many cases the market has gotten ahead of itself and the price has surged ahead of our view of the long-term, intrinsic valuation of the company.
We have previously said that we project lithium prices will remain high for the foreseeable future as demand is expected to outstrip supply over the next decade. We expect that the impact of this legislation will only help to bolster our forecast.
The new law provides subsidies for electric vehicles and plug-in hybrids, as long as a minimum proportion of critical minerals, including lithium, comes from the U.S. or its free trade partners. We think this will benefit all lithium producers due to an increase in demand, which should keep the market undersupplied longer. This further bolsters our current view that the lithium market will remain undersupplied throughout the rest of the decade, which will push prices well above the marginal cost of production.
Considering many of the clean energy stocks are already fully valued to overvalued, we think investing in the lithium producers remains one area to capture further upside potential from this spending.
The act contains several provisions meant to drive government savings on pharmaceutical spending, mainly through drug price negotiations and inflation caps. According to Karen Andersen, Morningstar’s strategist covering the healthcare sector, there are three key measures that will affect drug company revenues:
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.