With Conference of the Parties 26 fast approaching, it’s clear that the one of the main megatrends of this era is related to climate change. The problem is any stock related to renewable energy or hydrogen is already way too expensive, as these are the sectors which have been so in vogue over the last couple of years.
With guru Daniel Loeb (Trades, Portfolio) saying in his most recent investor letter there is perhaps no bigger environment, social and governance opportunity than in “Big Oil," this got me thinking and researching.
A recent Wall Street Journal article titled “Big Energy Companies’ New Pitch: ‘Carbon-Neutral’ Oil and Gas” was very interesting. It mentioned a FTSE 100 Industrials company called Intertek Group PLC (LSE:ITRK, Financial) working with Lundin Energy AB (OSTO:LUNE, Financial). What it specifically said was:
"Scandinavian offshore driller Lundin said this year it was the first to sell certified “carbon-neutrally produced” oil, which London-based Intertek Group PLC verified under its CarbonZero certification. Intertek says Lundin’s offsets cover the emissions created when the oil is produced, but not when it is transported and burned."
The excerpt reminded me of the “picks and shovels” strategy of not investing in gold mining during a gold mining boom, but in the suppliers of equipment, which is a much less risky strategy. In the race for “net zero” by pretty much every large company on the planet, which are trying to decarbonize, and the auditing of emissions reduction, value is going to be found in a low-risk service that is supplying the boom in decarbonization without actually taking much risk in the success or failure of a company.
More and more investors are asking for independent measurements that companies are not cheating on their ESG efforts. In other words, if an ESG-conscious investor is going to pay up for a high-scoring ESG company, it wants verification. This presents a massive opportunity for the big auditors and testing companies in environmental areas.
A closer look at Intertek
CEO André Lacroix saw this trend quite early on and has been moving the company in this direction since he joined in 2015, mainly by offering supply chain assurance as well as testing, inspection and certification.
Over the last couple of years, Intertek has launched its complete sustainability audit. The company has about 3,000 auditors in over 100 countries, so it is well positioned to gain as interest in ESG becomes a more global investment topic rather than just a European one.
Currently, the assurance division, which assesses each aspect of a company’s supply chain, represents nearly 20% of revenue and is growing fast.
Intertek’s core business is testing all kinds of products, “from meatballs to mini skirts,” for quality, safety and sustainability. This segment makes up about 60% of sales.
Obviously, the pandemic temporarily disrupted testing abilities, but supply chains and construction projects were also delayed, meaning there is now some pent-up demand as the world starts to get back to business.
Intertek has a first-mover advantage and its credibility in the area means it can cherry-pick the best work (higher margin). With this bargaining power over customers, it should be able to lift profit margins over the coming years.
The company has a strong presence in the resources industry, carrying out inspections in oil and gas and mining. One question is whether or not the company will be able to offset the decline in oil drilling from the growth in renewable energy, but the growth in carbon neutral oil and gas will also be an attractive area for growth.
Then there is the infrastructure side of things. The “build back better” theme and massive governmental spending with a green tilt is a massive opportunity for Intertek. Building projects will be focusing on reducing emissions through energy efficiency, reusing and recycling materials as much as possible and better management of environmental impacts. Any claim of greenness, of course, will require extensive testing, inspection and certification, else it’s just greenwashing. Investors are getting more conscious of greenwashing, where companies just talk the talk, so certification is going to be key to see if a company is really walking the walk.
Can Intertek take advantage of President Biden's $2 trillion plan? I think so. It has a large U.S. business due to the acquisition of PSI in 2015.
So how is Intertek priced? Perhaps it’s already been caught up in the ESG mania sweeping the markets? Not exactly. The GF Value indicator puts the stock as fairly valued. The stock has a reasonable Piotroski F-Score of 6, placing it toward the value side of the equation. With an Altman Z-Score of 5, the company has excellent credit quality, meaning it could borrow more to fund acquisitions or pay more dividends if it wanted to.
I’ll be waiting for the company’s full-year results in early March before I decide to buy or not, but this climate picks and shovels stock goes on my watchlist.
