|Kiplinger.com, Winter, 2018. This article was written with Ken Berman, founder of Gorilla Trades. It was part of a series of articles developed under an agreement with Kiplinger negotiated by me to designate Mr. Berman as a contributor and to deliver original articles for them on a regular basis.|
If the federal government can pass something as rancorous and partisan as the Republicans’ tax law, then a bill that can garner bipartisan support and is (almost) equally beneficial for every American citizen should be easy. That “something” is infrastructure, and the Trump administration has signaled an ambitious plan to rebuild America’s aging bridges, roads and other parts of our decrepit infrastructure.
The thinking here follows the advice given by Deep Throat to Washington Post reporters Bob Woodward and Carl Bernstein: Follow the money. At present, expectations are the administration will try to pass a deal that includes $200 billion in new spending, as well as various incentives that could push total spending to about $1 trillion over the next 10 years.
Companies that benefit from infrastructure spending have had slim pickings over the past decade. For most of the past 10 years, Congress has spent only what was necessary, with states sometimes having to pitch in and raise gas taxes.
However, these five companies should look like attractive stocks to buy if the sluices open for infrastructure spending in 2018 – a likely outcome.
- Market value: $6.1 billion
- Dividend yield: N/A
- Aecom (ACM, $38.68) is a global engineering and construction company with an impressive track record for generating free cash flow — $1.9 billion over the last three years — in tepid environments.
Accordingly, with as much as $1 trillion in new spending, Aecom’s cash flow should grow.
Further, Aecom has demonstrated its commitment to returning capital to investors. In September, Aecom announced a $1 billion share buyback – an impressive amount given that the company’s market capitalization is just better than $6 billion.
More cash and fewer shares outstanding amid more spending by the states and federal government offer fertile ground for appreciation of ACM. Analysts at Bank of America/Merrill Lynch concur, saying Aecom should be “a strong beneficiary of higher US infrastructure and defense spending.”
- Market value: $100.3 billion
- Dividend yield: 1.8%
- Caterpillar (CAT, $168.50) is a heavy equipment manufacturer, but even before the “I” word entered everyday political parlance, things were starting to look brighter for CAT. Thanks to a synchronized global recovery, Caterpillar expects to see growth in demand for parts in its mining, oil/gas and rail businesses, not to mention higher mining truck shipments and increased construction equipment sales.
Given long lead times, few analysts (or even CAT itself) expect U.S. infrastructure spending to have much of an impact on the company during 2018. However, up to $1 trillion in new spending offers an opportunity no other heavy equipment manufacturer — not Deere (DE) or Cummins (CMI) — can capitalize on the way CAT can with its diversified business model covering transportation, construction and natural resources.
Caterpillar’s stock has been on a tear since the start of 2016, up nearly 170% in that time, so investors may want to look for a pullback before buying shares. A 1.8% dividend yield makes the wait for infrastructure spending to kick in a little more palatable, though given the company’s past couple years, any increases to that payout may be minimal.
(3/4) Martin Marietta Materials and Vulcan Materials
- MMM Market value: $14.3 billion
- MMM dividend yield: 0.8%
- VMC market value: $17.8 billion
- VMC dividend yield: 0.8%
Crushed stone, sand and gravel as well as aggregates used in concrete represent the foundation (literally) of new or rehabilitated infrastructure. Accordingly, a rising tide should lift all boats, but in particular, Martin Marietta Materials (MLM, $227.04) and Vulcan Materials (VMC, $134.58) are positioned to win.
The geographic diversity that these companies have been able to achieve in their operations — Vulcan in 20 states and Washington, D.C.; Martin Marietta in 26 — will give them pricing advantages because shipping rocks is expensive, and shortening distances saves money. Remember: Stone and sand represent the ultimate commodities, so pricing is tight. Any cost advantage is significant in terms of what it can pull to the bottom line.
Analysts at Bank of America/Merrill Lynch have sounded off on Vulcan, saying they expect an uptick in construction activity to raise the company’s sales and improve its profitability. However, Martin Marietta does have a valuation edge, trading at 26 times analysts’ estimates for next year’s earnings, versus VMC’s 32.
- Market value: $22.0 billion
- Dividend yield: 2.2%
- Nucor (NUE, $69.26) is the United States’ largest steel producer. Its mini-mills enable it to produce steel at a lower cost than larger, integrated mills.
Nucor is likely to be among the biggest beneficiaries of higher infrastructure spending. Given the political rancor over perceived trade inequities in general – and in the steel industry in particular where a Commerce Department investigation may result in steel import tariffs – Nucor has the opportunity to provide much of the steel needed to build bridges pipelines, tunnels and railroads.
This upside from infrastructure spending joins what analysts at BMO Capital Markets see as organic improvement in the steel industry from increased demand net of any new infrastructure spending. Moreover, Nucor is a Dividend Aristocrat that has improved its annual payout for 44 consecutive years.