The proposed $2 trillion of infrastructure spending could mean upside potential for infrastructure stocks
Good infrastructure, including bridges, roads, airports, utilities, can increase the productive potential of an economy. President Joseph Biden has recently released details of his “Build Back Better” plan, which includes around $2 trillion of infrastructure spending stateside. Therefore, today’s article introduces seven infrastructure stocks excited for the $2 trillion Biden plan.
Many analysts concur that a great deal of infrastructure across the nation has been in need of revitalization. Thus, the proposed projects will be welcome by many communities and citizens. Meanwhile, economists highlight the importance of infrastructure investment in driving economic growth, especially following the uncertainty created by the pandemic.
According to recent research by Jeffrey M. Stupak of the Congressional Research Service (CRS), “Over the past several decades, government investment in infrastructure as a percentage of gross domestic product (GDP) has declined. Annual infrastructure investment by federal, state, and local governments peaked in the late 1930s, at about 4.2% of GDP, and since has fallen to about 1.6% of GDP in 2016.”
With the infrastructure plan proposed by the new administration, an investment of about $2 trillion across the nation is expected. As a result, there could be massive upside potential not only for traditional infrastructure stocks but also for some high growth stocks. As our economy opens up, many companies will benefit from low interest rates and the massive government stimulus. However, we should remind InvestorPlace.com readers that they are mostly cyclical stocks, ebbing with the news regarding the economy. Therefore, their share prices can also be volatile at times.
With that information, here are seven infrastructure stocks that are well-positioned to benefit from the upcoming investments in infrastructure projects:
Columbus McKinnon (NASDAQ:CMCO)
Global X U.S. Infrastructure Development ETF (BATS:PAVE)
Martin Marietta Materials (NYSE:MLM)
SPDR S&P Kensho Intelligent Structures ETF (NYSEARCA:SIMS)
Infrastructure Stocks: Caterpillar (CAT)
52-week range: $100.22-$237.78
Year-to-date (YTD) price change: Up about 25%
Dividend yield: 1.8%
Our first stock is a member of the Dow Jones Industrial Average (DJIA). The Deerfield, Illinois based Caterpillar is one of the largest manufacturers of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.
At the end of January, Caterpillar announced its 2020 full year and Q4 financials. The company reports revenue in four segments: construction industries, resource industries, energy & transportation, and Caterpillar Financial Services. Over 40% of revenues come from North America. Put another way, it has a large global footprint, too.
Total sales were $11.2 billion, implying a 15% decline year-over-year (YoY). Net earnings were down by 29% YoY and stood at $780 million. EPS was $1.42, compared with $1.97 profit per share in Q4 2019. The company ended the year with a $9.4 billion cash figure.
CEO Jim Umpleby cited “We do expect 2021 to be a better year than 2020 for us. We expect higher sales, but just given the uncertainty around the pandemic, the rollout of the vaccine, the resulting impact on the global economy, although we expect it to be a better year, it’s difficult for us to quantify how much better it will be just based on the pandemic.”
CAT stock’s forward price-to-earnings (P/E) ratio and price-to-sales (P/S) ratios are 29.5 and 3.07, respectively. Given the upcoming earnings season, there could be short-term profit-taking in the shares. A potential decline toward the $215 level would improve the margin of safety in the shares of this iconic company. On a final note, the company is a dividend aristocrat with almost three decades of dividend increases.
Columbus McKinnon (CMCO)
52-week range: $21.52-$57.06
YTD price change: Up about 38%
Dividend yield: 0.46%
Our next company is the Getzville, New York based material handling specialist Columbus McKinnon. It designs motion control products and technologies that move, lift, position and secure materials. The group’s products include hoists, actuators, rigging tools, light rail work stations and digital power and motion control systems. They are used in many industries, including construction and infrastructure, mining, oil, energy, aerospace, transportation, automotive, heavy equipment manufacturing and entertainment.
In late January, CMCO announced financial results for its fiscal year 2021 third quarter, which ended Dec. 31, 2020. Revenue was down by 16.5% YoY to $166.5 million mainly due to the pandemic’s adverse impact on volumes. The company generates 53% of its sales from the U.S. Net income also slid from $15.3 million in Q3 2020 to $6.6 million in Q3 2021. Hence, diluted EPS fell from 63 cents to 27 cents. Free cash flow recorded was $22 million at the end of the period.
CEO David Wilson commented, “We delivered solid results in adverse conditions with revenue exceeding our expectations. We are optimistic that growth will accelerate in fiscal 2022 as demand improves and channel partners replenish inventories. Given current macroeconomic forecasts, we expect to return to more normalized revenue levels by this time next year.” The company expects Q4 2021 sales to be within $175-$180 million range.
CMCO stock’s forward P/E and P/S ratio of the stock stands at 24.04 and 1.92. Moving items around plants, construction sites, or factories might not sound like a growth area. However, Columbus McKinnon is likely to benefit from increased infrastructure spending. The shares would offer better value around $50.
52-week range: $7.30-$39.10
YTD % change: Up about 29%
Dividend yield: 0.87%
Phoenix, Arizona-based miner Freeport-McMoRan is the largest copper producer in the world. Since copper is an important commodity in building and construction work, the company has been in the limelight in recent weeks.
Meanwhile, the price of copper has also been on the rise, providing tailwinds for FCX share price. In March 2020, the price of copper was about $2 per pound. Now it is about $4 per pound. Part of the increase in the commodity price is due to copper’s role in green energy as electric vehicles (EVs) use copper, too. It is also used in solar and wind technologies.
The company operates through geographical assets with reserves of copper, gold and molybdenum. The segments include refined copper products, copper in concentrate, gold, molybdenum, oil and other.
Freeport-McMoRan reported fourth quarter and 2020 full year results in late January. Consolidated sales totaled $4.5 billion in the fourth quarter, compared to $3.91 billion in the prior year period. Adjusted net income totaled $566 million, or 39 cents per share. As of Dec. 31, 2020, it had $3.66 billion in cash and equivalents in hand.
CEO Richard C. Adkerson said, “We are enthusiastic about the future prospects for our business based on the positive outlook for the markets we serve, our long-lived and high-quality copper assets, our seasoned and highly motivated global organization and the critical role of copper to the technologies necessary to deliver clean energy and support the global transition to a low-carbon economy.”
FCX stock’s forward P/E and P/S ratios are 15.11 and 3.54, respectively. A decline toward $33 would offer a better entry point into the shares of the mining group. 2020 has been a fantastic year for most commodities. Analysts concur that the industry outlook for copper is positive, potentially providing tailwinds for increased cash flow for the company.
Global X U.S. Infrastructure Development ETF (PAVE)
52-Week Range: $11.99-$25.88
YTD change: About 21%
Dividend Yield: 0.4%
Expense Ratio: 0.47% per year
Our next discussion centers around a thematic exchange-traded fund (ETF) Global X U.S. Infrastructure Development. The fund invests in firms that could benefit from a potential increase in infrastructure activity stateside. Such businesses could produce of raw materials or manufacture or lease heavy equipment. They might also come from engineering, and construction segments.
PAVE, which has 101 holdings, tracks the Index U.S. Infrastructure Development Index. The ETF started trading in 2017 and net assets under management total $2.62 billion. Approximately 30% of the holdings are in the top ten stocks.
Among the leading names are Deere (NYSE:DE), which manufactures agricultural equipment, Parker Hannifin (NYSE:PH), an industrial conglomerate, and Eaton (NYSE:ETN), a diversified power management company. In terms of sectors, industrials, materials and information technology (IT) make up 64.4%, 22.5% and 5.2% of its holdings, respectively.
Over the past 12 months, PAVE has returned close to 92%. There could be some profit-taking in the coming weeks as many of the names in the fund report earnings. Interested investors could consider a decline toward the $23 level as a potential entry point.
Martin Marietta Materials (MLM)
52-week range: $151.94-$353.56
YTD % change: Up about 22%
Dividend yield: 0.67%
Raleigh, North Carolina-based Martin Marietta Materials supplies aggregates products (such as crushed stone, sand, and gravel) used in construction as well as in in agricultural, utility and environmental applications. The company operates under three segments: Aggregates Business, Cement Business and Magnesia Specialties Business. In 2020, Martin Marietta sold 187 million tons of aggregates.
The group reported fourth-quarter and 2020 full-year results in mid-February. Net sales were $1.18 billion, a small increase from $1.10 billion from Q4 2019. Net earnings increased 40% to $183 million. Earnings-per-diluted-share also went up by 40% to $2.93 from the previous year. Cash provided by operating activities was $1.05 billion, an all-time record, in 2020 compared with $966.1 million in 2019. Martin Marietta had $304.4 million of cash and equivalents on hand as of Dec. 31, 2020.
CEO Ward Nye, stated, “Our resilient business model and team’s commitment to Martin Marietta’s vision and strategic priorities enabled us to achieve record fourth-quarter results and deliver record full-year profitability and the best safety performance in our Company’s history. Notably, 2020 marked our ninth consecutive year of growth for products and services revenues, gross profit, Adjusted EBITDA and earnings-per-diluted-share.”
Over the past year, MLM shares have returned 76%. Like most companies in the sector, Martin Marietta benefitted from investor belief that the recovery would be faster than initially expected. Forward P/E and P/S ratios are 30.49 and 4.51, respectively. Those investors who believe the construction-led upcycle will benefit the company could consider investing around $330.
52-week range: $34.72-$82.76
YTD price change: Up about 50%
Dividend yield: 2.04%
Charlotte, North Carolina based Nucor is one of the largest steelmakers stateside. The company is involved in every phase of steelmaking, from collecting and processing scrap to manufacturing value-added fabricated steel products. As a result of the proposed U.S. spending, the company has been in the limelight.
Nucor announced Q4 2020 figures at the end of January. The top line rose by 2.5% YoY to $5.26 billion. Diluted EPS jumped from 35 cents levels in Q4 2019 to $1.30 in Q4 2020. Cash and equivalents were $2.64 million.
CEO Leon Topalian said, “Looking ahead, we are confident that Nucor is poised for continued growth, and we anticipate earnings in the first quarter of 2021 to significantly increase from the fourth quarter of 2020.” According to company guidance, which was updated on March 16th, Nucor expects to announce record breaking quarterly earnings in Q1 2021, as diluted EPS is anticipated to be in the range of $3.00-$3.10.
NUE stock’s forward P/E and P/S ratios are 8.32 and 1.2, respectively. Interested investors who believe steel sales will increase could regard any decline in the shares as a good opportunity to invest for the long-term.
SPDR S&P Kensho Intelligent Structures ETF (SIMS)
52-Week Range: $23.85-$47.29
Dividend Yield: 0.55%
YTD Price Change: Up about 10%
Expense Ratio: 0.45% per year
President Biden is adamant that his administration will increasingly push for sustainable infrastructure. His proposed plan includes a commitment to invest in green energy and high-speed internet. The SPDR S&P Kensho Intelligent Structures ETF gives access to the next-generation of intelligent infrastructure stocks. Those businesses typically include smart building infrastructure, smart power grids, intelligent transportation infrastructure and intelligent water infrastructure.
SIMS, which has 46 holdings, tracks the returns of the S&P Kensho Intelligent Infrastructure Index. The fund began trading in December 2017. The top 10 firms make up more than 31% of net assets of almost $50 million.
Residential security solutions provider Resideo Technologies (NYSE:REZI), EV charging equipment operator and provider Blink Charging (NASDAQ:BLNK), and lighting solutions provider Acuity Brands (NYSE:AYI) lead the names in the roster.
Over the past year, the fund is up about 88% and hit its highest peak in over two years on April 8. Those investors who believe the need to lower carbon emissions and the importance of alternative energy companies in ensuring a more sustainable future should keep SIMS on their radar.
Note: This article originally appeared at InvestorPlace.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies.
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