Will Vaccine Transport Boost the Industrial Cold-Chain Opportunity?

The biopharmaceutical cold chain is mission-critical in ensuring that vaccines are delivered from the point of manufacturing to the consumer. However, a lack of adequate equipment is a recurring problem in the cold chain, with few countries having suitable ultracold infrastructure in place to meet any surge in demand for vaccines.

We think that the coronavirus-vaccine-related windfall meaningfully adds to the biopharma cold chain's total addressable market, and we expect that this market will grow over 1.5 times the compound annual growth rate of the broader cold-chain market. Further, a short-term windfall could add hundreds of millions of dollars in sales for Emerson EMR, Carrier CARR, and Trane Technologies TT by 2022.

Nevertheless, we don't see a meaningful, long-term impact for these companies. Indeed, we estimate that healthcare cold-chain sales will represent less than 2% of total sales for these firms by 2025. Even the short-term windfall in a bull-case scenario would only represent just over 2% of sales in 2022. Yet, despite the media attention that this opportunity receives, even if these firms' healthcare cold-chain businesses were to grow at multiples of their core businesses and each firm manages to capture incremental share in the healthcare cold-chain market, it won't budge valuations by more than a few percentage points, at best.

Vaccine Transport Will Only Make a Marginal Impact on Firms' Revenue

Make no mistake, the vaccine cold chain is extremely complicated--and extremely essential.

Properly maintaining the chain entails complex choreography that requires suppliers to follow several critical procedures. The infrastructure includes equipment and facilities such as refrigerators, freezers, cold rooms, ice boxes, temperature-monitoring devices, and dry ice. In certain vaccines, deviating from recommended temperatures could result in permanent loss of potency and ultimately spoilage. And a breakdown in the cold chain could require extra doses for patients, who may not comply, and also lead to a loss of public confidence in vaccinations.

Additionally, we've seen estimates that only 25 to 30 countries have ultracold infrastructure in place, leaving open much market opportunity.

But despite this need, even in the strongest bull-case scenario (which is unlikely), biopharma cold-chain sales would be marginal: We expect they would add an unremarkable $150 million of incremental sales to Emerson Electric's 2025 Visible Alpha consensus sales expectations of $21.8 billion and less than $300 million of incremental sales to Carrier and Trane's 2025 consensus sales expectations of $23.0 billion and $16.6 billion, respectively. Despite a short-term windfall in both 2021 and 2022, long-term incremental sales aren't enough to meaningfully affect stock valuations of the industrials we cover.

Admittedly, the question of whether COVID-19 becomes endemic is an important variable that will impact this sector's potential. But even so, we still think it's reasonable to expect that:

• COVID-19-related demand will begin to normalize in the latter years of our forecast, and
• Pharmaceutical companies may seek additional commercial opportunities for their COVID-19 vaccines, including annual boosters for more vulnerable segments of the population and repricing.

Emerson

Morningstar Rating: ★★★ Morningstar Economic Moat Rating: Wide Fair Value Estimate (as of July 28, 2021): $100

Considering its commercial and residential solutions sales, we find that Emerson's healthcare vertical represented only about 5% of the firm's total 2020 cold-chain sales, and less than 1% of total 2020 sales. Emerson's own figures estimate about a 15% market share of its total cold-chain serviceable addressable market.

Even assuming an unlikely scenario in which Emerson is able to capture 10% greater market share than it currently enjoys, the COVID-19 vaccine cold-chain-related windfall would not make a material impact on its valuation.

That said, because healthcare only represents one small end market in the firm's cold-chain sales, it's possible that the pandemic may present additional cold-chain opportunities for Emerson, such as food retail. Still, we don't expect these opportunities to make an outsize impact on Emerson's bottom line, or greatly enrich shareholders, because of the firm's small base.

Carrier

Morningstar Rating: ★★ Morningstar Economic Moat Rating: Narrow Fair Value Estimate (as of July 28, 2021): $37

Trane Technologies

Morningstar Rating: ★ Morningstar Economic Moat Rating: Narrow Fair Value Estimate (as of July 28, 2021): $115

We think the cold-chain growth opportunity stemming from COVID-19 vaccine distribution could benefit Carrier and Trane’s transport refrigeration businesses. However, this business represents less than 20% of sales for Trane and less than 15% of sales for Carrier. Again, consider that temperature-sensitive pharmaceuticals represent just a fraction of all perishable goods. Assuming these firms’ pharmaceutical-related cold-chain sales grow in line with our market expectations, this portion of the business could more than triple compared with 2020 levels over the near term. But even so, we estimate it would represent less than 4% of consolidated revenue for both Carrier and Trane, and this incremental revenue will pale in comparison to other growth opportunities.