Extreme heat poses not only a threat to health and life but also to investors in various industries. From frozen food suppliers to home goods companies, the impacts of high temperatures can be detrimental. When temperatures spike, crop failures occur, discretionary spending decreases, and even data centers, the backbone of the information economy, can crash. However, there are also businesses that benefit from rising temperatures, such as air conditioner and auto parts manufacturers.
As the effects of climate change intensify, investors must pay closer attention to these risks. According to a study by Climate Central, extreme heat events have become five times more likely due to human-caused climate change. Data from S&P Global indicates that, by 2050, over 90% of major companies will have at least one financially exposed asset affected by climate-related extremes. Despite facing potential threats, only a limited number of companies provide detailed information about the location and climate risks associated with their infrastructure.
Although quarterly earnings calls rarely mention extreme heat, this is likely to change in the coming months due to the severity of recent temperature spikes. Last week, global temperatures reached their highest recorded level in history, as reported by the World Meteorological Organization. The intensity of heat continues to grip the world, with cities like Phoenix enduring temperatures exceeding 110 degrees for 11 consecutive days. California is also expected to experience temperatures 15 degrees higher than average in the next few days, while intense heat waves affect Texas and other states.
Among those affected by extreme heat, agriculture companies have previously expressed concerns during earnings calls. Kurt Barton, the Chief Financial Officer of Tractor Supply (TSCO), remarked during a period of extreme weather last year, “The extreme heat and drought conditions are continuing into the third quarter, and we forecast these conditions will limit upside to sales.”
As the risks associated with extreme heat persist and intensify, it is crucial for companies and investors to proactively address and mitigate these challenges. Failure to do so could have severe implications for financial performance and resilience in the face of climate change.
Extreme Heat Takes a Toll on Potato Crops
CEO Thomas Werner of Lamb Weston Holdings, a food processing company based in Idaho, expressed concern over the below-average yields and quality of potato crops in the Columbia Basin, Idaho, and Alberta regions. The extreme heat experienced during the summer months has greatly impacted the crops.
The Impact on Consumer Activity and Equipment Operation
Extreme heat can discourage individuals from venturing out to shop or dine at restaurants, leading them to stay indoors instead. This detrimental effect on consumer activity has been acknowledged by Lowe’s, a home and construction retailer.
Additionally, extreme heat poses challenges for companies that rely on equipment prone to overheating, such as data centers. During a London heatwave last year, servers at data centers used by Alphabet and Oracle experienced temporary disruptions.
Seizing Opportunities in Extreme Heat
Companies specializing in heating, ventilation, and air conditioning (HVAC), including Carrier Global and Ingersoll Rand, have witnessed a surge in their stock prices. As the demand for HVAC solutions rises due to extreme heat, these companies have experienced 9% and 5% growth respectively in the past week.
Auto parts suppliers have also seen business benefits from extreme heat. The need for increased maintenance caused by the severe weather can lead to higher sales for these companies. Batteries and other auto parts are particularly susceptible to the harsh conditions during a heatwave, resulting in more customers seeking repairs and replacements in the months that follow.
According to Gregory Johnson, CEO of O’Reilly Automotive, their July sales volume has shown improvement compared to expectations, partially influenced by the ongoing extreme heat across numerous markets in 2022. Other notable auto parts companies capitalizing on the advantages of extreme heat include AutoZone and Genuine Parts.
Conclusion
Extreme heat has far-reaching consequences, affecting various industries such as agriculture, consumer activity, and equipment operation. While it poses significant challenges, it also presents lucrative opportunities for companies specializing in HVAC and auto parts. As extreme heat continues to persist, businesses must adapt and seize these opportunities for growth.