Essex GEOS: Clean Tech Solutions at this point in the Cycle
As we have listened to quarterly corporate earnings calls for the second quarter, followed by meetings with many management teams over the course of the third quarter, one oft-repeated theme expressed is rising input costs, whether labor, freight, materials or components. Company management teams are also experiencing some commodity price pressures for materials such as copper, nickel and pockets of oil price challenges. This trend is reflected in the core consumer price index (CPI) which, while barely breaching 2.0% in its last print, is showing some signs of pricing pressures. Most of our companies are passing these rising materials costs onto their customers, which should cause some finished goods inflation. Freight costs are increasing, as exhibited by the two charts below. The first shows the rising Baltic Exchange Dry Index, which is up 60% since April, and the second, rising transportation costs as shown by U.S. diesel prices, which have increased 20% since last year.
Source: Bloomberg, 10/4/18
Source: Bloomberg, 10/4/18
We believe margin price pressures will continue, placing a premium on productivity and corporate efficiency. This is a challenge where the transformative technologies of GEOS are well represented and positioned across our themes and holdings, from energy efficiency, to renewable energy. What better way to limit commodity price risk at a commercial or industrial setting, than to lower electricity costs by installing LED lighting, and solar power systems to eliminate natural gas commodity risk?
A major challenge for companies is balancing growth amidst increasing input costs. Since 2010, our domestic unemployment rate has declined from 10.0% to 3.9% as of September. Tight labor markets and little slack in the economy with increasing costs means companies must continue to hone their productivity skills, investing in their business operations with efficiency and returns on investment as the key criteria. GEOS has significant exposure to industrial automation technology, including asset tracking systems to improve operational efficiencies throughout the manufacturing and fulfillment process. Asset tracking systems enhance communication and information so companies can optimize manufacturing and shipping, ultimately increasing productivity and throughput. We have heard frequently that as commodity prices rise, companies limit inventory levels in favor of quick-turns of materials and finished goods. Asset tracking systems can sort and identify objects with much greater accuracy than RFID technologies. Fleet management can also be improved with technologies that lessen fuel, truck and driver use, a key solution as commercial industry faces a driver shortage.
We believe the GEOS holdings are well positioned for the longer-term as our world is facing the greatest environmental challenges in history. We believe these challenges provide significant long-term investment opportunities, yet the nearer-term challenges of rising input costs also present opportunities for transformative technologies that limit business risks and enhance returns.
Disclosures:
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
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