Natural disasters have increased globally in recent years – from 2001 to 2020 there were approximately 350 to 500 medium and large scale disasters per year, compared to 90 to 100 per year from 1970 to 2000. projections assume number of disasters could increase even more to 560 by 2030.(1) But greater access to technology has enabled broader awareness, faster response times, and more precise recovery efforts, while highlighting the need for a emergency power generation. In the United States, it is easier to observe the evolution of the impact of hurricanes and storms. In 2005, Hurricane Katrina caused over 1,800 deaths and $173 billion in damage (adjusted for inflation). In 2017, the United States experienced a series of severe tropical storms, including hurricanes Harvey and Irma. Combined, Harvey and Irma caused about 185 deaths (1/10 of Katrina’s deaths), but the economic damage was only slightly less than that caused by Katrina – about $168 billion (adjusted for inflation). While there are differences between flood extent, infrastructure and demographics, the disparity in fatalities could also be explained by the growth in resilience to natural disasters over these 12 years. This includes an increase in earlier forecasts, more resilient infrastructure, emergency preparedness and response systems.(2) VettaFi Natural Disaster Recovery and Mitigation Index (VFFEMA) aims to track companies that drive natural disaster mitigation and adaptation. Eligible constituents can meet at least one of the following three criteria: 1) those with government contracts for natural disaster recovery and mitigation, 2) businesses involved in home improvement retail, and 3 ) companies materially engaged in emergency/standby generators and batteries.
Multi-year government contracts provide a relatively stable revenue stream for natural disaster response and mitigation.
One of the criteria a voter must meet is having a government contract for disaster response or mitigation. This excludes diversified defense contractors, aerospace engineering, industrial conglomerates and communications equipment companies. These companies typically focus more on man-made disasters (i.e. national defense, geopolitical conflicts) than on natural disasters. An example of a constituent in this category is Fluor Corp (FLR), which currently has a public assistance contract with FEMA to assess public facilities damaged during national disasters and emergencies. FLR has had a long contracting relationship with FEMA since 1997 and has responded to over 100 natural and man-made disasters, including transporting and installing housing units after Hurricanes Katrina and Rita .(3) FLR’s current contract was awarded for a period of five years. through January 2023 and is valued at over $600 million.(4)
Home improvement companies can experience a positive impact on sales from natural disasters over several quarters.
A company could also meet the criteria for inclusion in the index if it falls within the home improvement retail sub-sector – companies like Home Depot (HD) and Lowe’s Companies (LOW). These companies can benefit from multiple quarters of sales growth from a single large-scale storm. In the quarter in which the storm occurs, sales could increase for preparation materials such as plywood, generators or tarps. After the storm, the company could see a few more quarters of strong salvage/cleanup materials and rebuilding materials sales. To give an example, hurricanes Harvey, Irma and Maria hit in August and September 2017. During this quarter, The Home Depot experienced a positive impact of $282 million in hurricane-related sales, including plywood and the generators. In 4Q17, The Home Depot saw even stronger positive sales of $380 million from recovery and rebuilding efforts, with continued 1H18 profits equating to approximately $600 million in additional sales.(5)
Backup power generation is becoming more important as the growing reliance on technology requires reliable access to electricity.
Companies that are physically engaged in emergency/standby power generation or batteries are playing an increasingly important role in responding to natural disasters as access to electricity becomes more important. Longer term trends such as connected devices, virtual work and 5G require reliable and uninterrupted access to power, even during events such as hurricanes and storms. Generac Holdings (GNRC), which manufactures standby power generation, saw its 1Q21 sales of home standby generators more than double from a year earlier after severe winter storms in February 2021 caused widespread power outages throughout Texas. In addition to the 110% year-on-year increase in 1Q21, residential product sales in 1Q22 were up a further 44% year-on-year. Even with this growth, the GNRC noted in its 1Q22 10Q that home standby generator penetration rates were only 5.5% of the total US residential addressable market(6)
Outperformance relative to broad global developed equities, partially offset by near-term weakness.
In terms of performance, the index outperformed its starting universe of developed global equities (the S-Network Developed World Equity 5000 Index [SNDW5K]) since its inception date March 20, 2020. But recently, the index has shown some weakness, especially in its home improvement components due to rising rates, a drop in existing home sales and persistent supply chain issues. These pressures, however, should be limited in the short term and demand for home improvement projects should return as homes continue to serve as places of work, education and entertainment even after the COVID-19 pandemic. .
Even if the frequency of natural disasters increases, it is possible to reduce the negative effects such as deaths and other property damage. Businesses that play a role in natural disaster recovery and mitigation are becoming increasingly important as reliance on technology has created a need for reliable access to electricity in the event of a natural disaster. .
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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.