TheChek News Flow

China isn’t cracking down on everything. Even as Beijing reins in e-commerce and online education, it is accelerating its push into renewable energy and electric vehicles, widening a global lead in these industries of the future.

That’s got alert investors buying stocks like Longi Green Energy Technology (ticker: 601012.China) and Wuxi Lead Intelligent Equipment (300450.China)—not household names, yet.

China has been nurturing renewables and EVs for a decade. That effort took a leap last September with the country’s first carbon-reduction targets: peak emissions by 2030 and carbon neutrality by 2060.

“We have nearly doubled our expectations for new solar installations over the next 10 years,” says Alex Whitworth, head of Asia-Pacific power and renewables research at consultant Wood Mackenzie. “The level of effort has changed from all levels of society.”

Beijing’s macro push dovetails with microeconomics that are making electric cars and solar/wind power cost-competitive with carbon-belching incumbents, says Andrey Glukhov, an emerging markets portfolio manager at TCW. That means growth could be underestimated. “Whatever trajectory we model has a good chance of being too conservative,” he says.

China dominates most relevant metrics, from EV sales to production of solar components. “There are solar-farm operators all over the world, but China controls the supply chain,” says Mubashira Bukhari Khwaja, an investment director at Aberdeen Standard Investments.

Investors have noticed. The KraneShares MSCI China Clean Technology Index exchange-traded fund (KGRN) has jumped 80% over the past year, while broader China shares are down 10%.

Further gains may require more discerning stock-picking. Specialist managers are lukewarm on the biggest companies in the Clean China ETF—EV manufacturers such as BYD (1211.Hong Kong) and Nio (NIO)—despite July sales that are double or triple last year’s figures.

A crowded field promises Darwinian fallout at some point. Batteries are a different story. Chinese champion Contemporary Amperex Technology (300750. China), or CATL, owns its home market and is gaining on Korean competitors globally. “CATL has really upped their game,” says Vivek Tanneeru, portfolio manager for Matthews Asia ESG fund.

A subsupplier to watch is Yunnan Energy New Material (002812.China), which specializes in the “separators” that keep batteries from short-circuiting.

The sweet spot in solar is also in “midstream” components makers rather than power generators, which are mostly state owned, Glukhov and Khwaja agree. The Aberdeen manager favors Longi Green, the top player in solar wafers, and Sungrow Power Supply (300274.China), a market leader in inverters, which convert photovoltaic energy into usable AC current. Wuxi Lead provides manufacturing systems for both EV batteries and the solar chain.

Chinese governance can still affect China’s EV and renewable-energy industries. Private solar-parts makers supply state power producers, which could call in bureaucrats to control prices.

Most polysilicon, the raw material for solar panels, is made in Xinjiang, a province notorious for Beijing’s persecution of the ethnic Uighur minority. The reason is cheap coal-fired power, also not a selling point.

But the industry looks strongly aligned with state interests, as China watchers like to say, which should carry it to new heights. “This is seen as a driver for huge economic growth and leverage to become a 21st-century tech leader,” Woodmac’s Whitworth says.

Cat Rock Capital, which urged Just Eat to merge with Takeaway, now wants one of Europe’s biggest food-delivery companies to fix how it talks to investors and sell assets. And it wants the company to explore a merger.

The U.S. activist investor says Just Eat Takeaway.com (ticker: GRUB) has committed errors that have made it one of the worst-performing among peers. Possible buyers include DoorDash (ticker: DASH), Amazon.com (AMZN), and Amsterdam-based Prosus, which tried to buy Just Eat in 2019.

In 2020, Cat Rock pressed Just Eat, then based in the U.K., to merge with Takeaway.com, of the Netherlands, over a rival bid from Prosus. The combined company then gobbled up GrubHub for $7.3 billion this year.

Cat Rock, one of Just Eat’s top shareholders, alleged in a July presentation that the company failed to convey to investors the costs of its infrastructure investments, and the short-term impact on earnings before interest, taxes, depreciation, and amortization, or Ebitda. Cat Rock said other missteps have left the stock “deeply undervalued.”

For example, DoorDash had $2.9 billion in pro forma 2020 revenue and adjusted Ebitda of $189 million, while Just Eat in 2020 generated $4.6 billion in pro forma revenue and $401 million in adjusted Ebitda. Yet DoorDash has a $59 billion valuation in the U.S.—three times that of Just Eat.

Just Eat told Barron’s it “has a regular dialogue with all its shareholders and we take all their views very seriously.” Just Eat is hosting a capital-markets day in October “to provide...increased visibility on how we will capitalize on...long-term growth opportunities.”

An earlier version of this article said that Cat Rock wanted Just Eat Takeaway.com to sell itself. Cat Rock wants the company to change how it talks to investors, sell assets, and to explore a merger.

There aren’t many European stocks as hot as Nokia this year.

The U.S.-listed shares (ticker: NOK) of the Finnish telecom-equipment maker have surged 60% this year to a recent $6.28. The story is simple enough—telecom operators around the world are upgrading their equipment to support faster 5G technology. Nokia is one of a handful of companies to make that equipment, and a key rival, Huawei, is blocked from the U.S. and a number of other Western countries over national-security concerns.

The more complicated story is that Nokia is recovering from a period of underperformance. Earnings per share more or less held constant between 2014 and 2020, and it didn’t pay any dividend in 2019 or 2020. Nokia said it made a product design mistake when it started making microchips for its 5G products, and Verizon Communications (VZ) opted for Samsung instead of Nokia on a critical 5G contract.

Nokia said in its second-quarter earnings call that customers have returned. In the U.S., Verizon is still a key customer, and it has signed five-year deals with T-Mobile (TMUS) and AT&T (T). But competition is fierce—Swedish rival Ericsson (ERIC) won a slice of a joint 5G contract from China Telecom (0728.Hong Kong) and China Unicom (0762.Hong Kong) that Nokia tried to land.

Nokia also says it’s benefiting from the work-at-home trend. “We do believe that there is some kind of structural underlying changes in the market, especially in home [broadband] connectivity,” CEO Pekka Lundmark told analysts, according to a transcript from S&P Global Market Intelligence.

But Lundmark also added that by the second half of 2021, Nokia will face tougher comparisons in mobile network developments. “So don’t just automatically assume that these percentages will continue. But structurally, [it’s a] good market going forward,” he said.

Like other meme stocks, Nokia has been a favorite among retail investors and Reddit users in recent months, and the year-to-date stock gain marks its best annual performance since 2013.

Analysts are focused on 2023, when Nokia aims for an operating margin between 10% and 13% on sales growing faster than the market. Management was asked on the call why it isn’t upgrading guidance; Nokia said it was too early to change a target it set only four months ago. According to FactSet, the ratio of Nokia’s enterprise value to earnings before interest, taxes, depreciation, and amortization, or Ebitda, is 10, compared with a median of 17 among competitors.

For the quarter, Nokia posted sales of 5.31 billion euros ($6.3 billion), up 4%—or 9% when adjusted for currency fluctuations. The consensus was €5.16 billion. Adjusted earnings per share were 9 euro cents, up from 6 euro cents a year ago and above the consensus of 4 euro cents.

Lundmark says a new, simplified organizational structure is paying off. “In the earlier setup, we had actually multiple...

management team members being partially responsible for one mobile network deal. Now it’s all in the Mobile Network business, and Tommi [Uitto] is fully responsible for that. So that is already showing its [positive] effects,” he said.

J.P. Morgan analyst Sandeep Deshpande reiterated an Overweight rating on Nokia after the earnings report. He noted that the mobile networks business saw its gross margin surge from 31.1% in the first quarter to 38.9%, if a one-time software contract is excluded.

When Ericsson turned around its networks business, margins rose from a low of 31.6% to 40.4%. “We don’t see any reason why 2Q ’21 is not a similar milestone for Nokia,” he said.

Of all the Big Oil stocks, Royal Dutch Shell is the one best positioned to deliver a gusher.

The British-Dutch colossus is the most profitable of the major international energy companies, yet it trades at a sharp discount to Exxon Mobil (ticker: XOM) and Chevron (CVX). Shell also offers investors a safe dividend yield of nearly 5%.

“Shell’s shares are materially undervalued based on the company’s industry-leading cash flows and strong franchises in liquefied natural gas, retail, and deep-water drilling,” says Dan Farb, a principal at Mill Pond Capital, a Boston investment firm that holds shares.

Investors can play Shell through two U.S.-listed shares that are economically equivalent and trade under the tickers RDS.A and RDS.B.

The American depositary shares for the U.K. shares (RDS.B), now around $40, are the better bet. They trade $1 below the ADS for the Dutch shares (RDS.A) and don’t subject U.S. investors to withholding taxes on dividends, as the Dutch shares do. The RDS.B stock yields 4.8%.

Several winning scenarios could bubble up for the shares. Investors may come to recognize just how cheap they are. Shell trades for eight times projected 2021 earnings of $4.95 a share, compared with a price/earnings ratio of 14 for Exxon and 16 for Chevron. Shell also has an underappreciated mix of assets, including the largest liquefied natural gas business and the industry’s biggest retail franchise. Shell has 46,000 service stations—more locations than McDonald’s (MCD) or Starbucks (SBUX).

The retail business alone could be worth $40 billion, or 10 times 2020 earnings before interest, taxes, depreciation, and amortization, or Ebitda. That is in line with the valuation of Alimentation Couche-Tard (ANCUF), a Quebec-based operator of more than 14,200 convenience stores, most offering fuel services, largely in the U.S. and Canada. Shell has a market value of $160 billion.

Another possibility is a sharply higher dividend. The company has increased its quarterly dividend 50%, to 48 cents a U.S.-listed share, from its 2020 low. Yet the dividend was 94 cents before the pandemic. Shell is aiming for 4% annual growth in the dividend from current levels, but it could do much more.

With similar free cash flow to Exxon, Shell is paying out $7.5 billion in annual dividends, versus $15 billion for its U.S. rival. At something close to an Exxon-like payout, Shell would yield 7% to 8%. Unlike Shell, both Exxon and Chevron maintained their dividends during the pandemic. Exxon yields 6.1% and Chevron, 5.3%.

“If management keeps capital expenditures restrained and restores Shell’s dividend payout ratio closer to that of its North American peers, shares could rally by over 50%,” Mill Pond’s Farb contends.

One intriguing idea, while unlikely, is a breakup of the company. A sum-of-the-parts analysis by Mill Pond would value Shell at about a 70% premium to the current price.

Looking to 2022, Royal Dutch Shell is expected to earn over $5 a share and generate $23 billion of free cash flow, slightly above Exxon’s.

Citing in part Shell’s 15% free-cash-flow yield, MKM Partners analyst John Gerdes recently lifted his price target on the RDS.B ADS by $8, to $76 a share. He sees $142 billion in total free cash flow from 2021 to 2026, nearly equal to the company’s market value, assuming Brent crude oil of $65 a barrel and natural gas at $2.90 for every thousand cubic feet. Brent crude is now $70, and gas is around $4 per thousand cubic feet.

Christyan Malek, a J.P. Morgan analyst, recently wrote that there was 50% potential upside in Shell, with the stock “well underpinned” by an average free-cash flow yield above 15% in 2021 and 2022, assuming crude at $70 a barrel. He has an Overweight rating on the stock.

On the Streetwise podcast, Jack Hough speaks with Bob Patel, CEO of LyondellBasell, about how the benefits of plastics are often overshadowed by incorrect disposal. With that, Patel unpacks future of growth opportunities for various materials alongside being environmentally-conscious.

One reason Shell and BP (BP) trade at discounts to their U.S. peers is that they face greater investor and political pressure to scale back their production of fossil fuels and invest in alternative strategies like wind and solar energy. Royal Dutch Shell is on board—but it isn’t going as far as BP, which is aiming to cut its oil and gas production by 40% by 2030.

Shell aims to cut its carbon emissions 20% by 2030 based on a 2016 base and get to zero net emissions by 2050. It is cutting back on some exploration activities and sees a 1% to 2% annual drop in its oil production.

Shell has focused on lower carbon-emitting natural gas, with gas projected to rise to 55% of its output from 45% by 2030. Just $2 billion to $3 billion of its roughly $20 billion of annual capital spending is earmarked for renewables—wind and solar power—and other clean-energy initiatives.

In May, a Dutch court ordered the company to reduce its global carbon emissions by 45% by 2030. The move was hailed by climate activists, but Shell plans to appeal—a process that could take two to three years.

Royal Dutch Shell management declined to talk to Barron’s. In a June post, CEO Ben van Beurden said: “For a long time to come we expect to continue providing energy in the form of oil and gas products both to meet customer demand, and to maintain a financially strong company.”

Given strong anti-fossil fuel sentiment in Europe, Shell carries more risk than its U.S. peers. But that risk is more than offset by a low valuation, a solid yield, the prospect of higher dividends, and maybe a corporate breakup.

The U.S. Senate could pass a $1 trillion bipartisan infrastructure bill in the next few days, setting the stage for funds to flow to transportation-infrastructure improvements, water and power-facility updates, and 21st-century priorities such as expansion of broadband access and attempts to address climate change. Another $3.5 trillion reconciliation bill, backed by Democrats only, could follow, with spending focused on “human infrastructure” like child care, education funding, and a Medicare expansion, plus additional climate-related measures.

Infrastructure-related stocks, from asphalt makers to construction-machinery companies, have rallied sharply in anticipation of the bills’ passage, and few bargains remain. Moreover, spending will be spread over many years, and the trillion-dollar headline number isn’t all that new; $550 billion of the price tag comes from previously unallocated funds.

Shares of Vulcan Materials (ticker: VMC), Martin Marietta Materials (MLM), Eagle Materials (EXP), and Summit Materials (SUM), which make concrete, cement, asphalt, and other traditional construction materials, are up 40% or more in the past year, bolstered by a strong housing market and demand for new warehouses and distribution centers, in addition to expectations for more infrastructure spending. The stocks now sport rich valuations; Vulcan trades for close to 32 times next year’s expected earnings, versus a long-term average of less than 27, while Martin Marietta has a price/earnings multiple of 28.

Investors looking to prosper from a deluge of spending might do better to focus on shares of engineering and inspection firms, such as Jacobs Engineering Group (J), Tetra Tech (TTEK), Parsons (PSN), Montrose Environmental Group (MEG), and Atlas Technical Consultants (ATCX). These companies tend to be hired at the start of new projects, to sign off on designs and contribute to feasibility studies. Infrastructure funds could begin to show up in their revenues before shovels get in the ground, possibly as soon as next year.

Jacobs, for example, provides engineering and design consulting and other technical services for power, water, and transportation-infrastructure projects. “J’s infrastructure design exposure is on the front end of actual sustainability projects across renewables, electric grid upgrades, hydrogen transportation, and net-zero designs,” Benchmark analyst Josh Sullivan wrote in a recent report.

Sullivan sees double-digit profit growth for Jacobs next year, and rates the stock a Buy with a $160 price target, about 24% above Friday’s close of $128.79. Eighty-eight percent of analysts covering Jacobs recommend the shares, which trade for 18.4 times forward earnings—below the market average.

The largest single item in the 2,700-page Infrastructure Investment and Jobs Act is $110 billion for roads, bridges, tunnels, and other major projects. Another $66 billion would go to passenger and freight rail, $39 billion to public transit, $25 billion to airports, and $17 billion to ports and waterways.

All this spending will also be a boon to construction-machinery companies—if they can handle it. Industrial and construction activity has been booming, and supply chains are stretched. “We already are seeing stronger heavy construction activity; it’s something we saw in the second quarter, and we expect that improvement to continue,” Caterpillar (CAT) CEO Jim Umpleby said on the company’s second-quarter earnings call. “That is irrespective of an infrastructure bill in the United States being passed.”

Companies such as Deere (DE), Terex (TEX), Oshkosh (OSK), and Manitowoc (MTW) likewise are benefiting from a red-hot construction market. Federal infrastructure spending would be incrementally positive for them. The same goes for United Rentals (URI), Herc Holdings (HRI), and WillScot Mobile Mini (WSC), which rent out construction equipment. But their shares, too, are trading at valuations that leave little room for error.

Water infrastructure gets $55 billion in the draft bill, aimed at replacing lead pipes, improving filtration systems, and cleaning up drinking water at schools and homes. Xylem (XYL) and Evoqua Water Technologies ( AQUA ) are two companies to watch; they sell treatment equipment, pumps, valves, and provide related services. Emerson Electric (EMR), Eaton (ETN), and Hubbell (HUBB) could see additional revenue, due to the $65 billion allocated to power infrastructure. But, again, it’s not a game-changer for the stocks.

Finally, the bill includes $7.5 billion for electric vehicle infrastructure, including $2.5 billion for charging. That’s not much relative to other allocations, but it is meaningful for a nascent industry. Newly public EV charging companies such as EVgo (EVGO), ChargePoint (CHPT), and Blink Charging (BLNK) are expected to have combined sales of less than $200 million this year. Expect sales to grow if the Democrats’ reconciliation bill passes; it includes hundreds of billions of dollars in additional climate-change-related spending, which could boost EV adoption.

The iShares U.S. Infrastructure exchange-traded fund (IFRA) has returned 47% in the past year, about 13 points ahead of the S&P 500. Assuming the infrastructure bill passes, investors will have to choose their spots carefully.