The G.W. Bush, Obama, and Trump administrations all pushed for infrastructure bills to repair the United States’ decaying transportation, power, water, and rural broadband systems, but there has been little desire by Congress to move any proposal forward.
However, the Covid-19 pandemic might be changing this. Local bridge and road projects are often funded by state budgets. Due to nationwide lockdowns and the subsequent recession, state tax revenues will fall significantly, forcing budget cuts. This could exacerbate an already weak economic situation because, according to the Brookings Institution, one in 10 U.S. jobs relates to infrastructure.
As a result, both U.S. political parties are pushing competing infrastructure proposals, spurred on by the Trump administration’s recent statement that they will present an infrastructure bill of at least $1T. The Democratic party’s House infrastructure bill, the Moving Forward Act, has a $1.5T budget, which includes $500B for transportation and $100B for schools as well as money for clean energy funds, rural broadband, the USPS, and an electric car charging network.
It is estimated the bill will create 1.9M jobs over a five-year period. In contrast, the current GOP Senate plan is only a reauthorization of the five-year $287B Highway Trust Fund. I’m skeptical that the parties will be able to reconcile their differences before the upcoming presidential election to pass a bill. Still, given the need for infrastructure improvements, fiscal stimulus to re-accelerate the economy, and putting unemployed Americans back to work, I believe a major infrastructure bill will pass in some form in the next year. Although very small in market cap, a way to gain exposure to this theme is through an ETF called Global X U.S. Infrastructure Development (PAVE).
There are at least a few dozen companies that could benefit significantly if such a bill passes. Below are stocks from several industry groups (cement, steel/metal, heavy machinery, rails, chemicals, leasing, and building contractors, among others) that should be on your watch list. These stocks generally rate well using William O’Neil + Co.’s proprietary EPS Rank and Composite Rating and have decent-to-positive technical setups.
Fastenal FAST (FAST) operates more than 2,000 construction material supply stores that sell fasteners, safety supplies, tools, hydraulics equipment, material handling, and electrical/welding equipment. The company’s sales growth has accelerated from 8% over five years to 11% over three years. Its pretax margins have been remarkably steady at 20–22% for the past decade, and EPS has grown in all but two years (2009, 2016) since 1990. The stock has reflected that success, rising sixfold since 2009. While the current breadth of stocks breaking to all-time highs is not great, FAST made new highs just six weeks after bottoming in March. The company’s outlook for the next few quarters calls for moderate top-line growth due to weak industrial production. However, growth is expected to resume in 2021 and an infrastructure bill could pull forward a re-acceleration.
Sika (SIKA.CH) provides construction materials including mortars, concrete systems, adhesives, thermoplastics, and coatings that support and reinforce buildings and structures. After the company purchased a mortar/adhesives company in 2019, revenue from the Americas rose to 27% of total revenue. Americas sales grew 23% y/y in Q1 2020, versus 15% growth for the group. Product categories that would benefit the most from an infrastructure bill are cement/concrete/mortar technologies and sealing/bonding and waterproofing. Through consolidation in a fragmented industry and steady mid-single-digit top-line growth, Sika has generated five-year sales growth of 8% and EPS growth of 14%. EBIT margins north of 12% are far better than those of its largest competitors. Sika expects 6–8% annual top-line growth through 2023 and EBIT margins of 15–18%. The stock is a huge long-term outperformer versus the general market and even more so versus its industry group. While its business may not be as sensitive to the passage of an infrastructure bill as other names I’ve highlighted, it is one of the highest quality names in the group.
United Rentals URI (URI) provides backhoes, forklifts, aerial work platforms (scissor/boom lifts), excavators, loaders, trench safety equipment, and power solutions and safety equipment for construction through rentals (85% of revenues) and sales (12%) across more than 1,100 retail outlets. It is easily the market leader for equipment rentals (13%) with double the share of its closest competitor. Behind non-residential construction, its second largest end-market vertical is infrastructure development. While construction spending per capita has fallen over the past decade, the equipment rental market is sharply outpacing that growth, and URI continues to take share. Sales growth has accelerated from 12% over five years to 19% over three years, while EPS growth rose from 25% over five years to 34% over three. Pretax margins have remained steady at 20–22% over five years. The stock has a been a good relative performer since 2009, and while its business is in a challenging period, investors should be encouraged by its strong recovery from March lows before an infrastructure bill is even on the table.
CRH (CRH; CRH LN) is a U.K.-based provider of cement, asphalt, and other building products for commercial and residential markets, with more than 50% of revenues from the U.S. Its largest product segments are aggregates/asphalt/ready mix, cement, and construction contract activities. The company has a variety of subsidiaries that operate under their own brands, covering 46 U.S. states and more than 1,000 locations. As a vertically integrated supplier, it is able to control material sourcing costs, efficiently distribute, and save on end-of-life costs by recycling materials. In constant currency, sales have grown 3% annually over five years, picking up to 8% in 2019, driven by double-digit growth in the U.S. Pretax margins have expanded from 4% in 2015 to 8% in 2019, driving annual profit growth of 17%. Despite challenges from Covid-19, the company notes that stimulus measures would be especially favorable for the building/construction segment. The stock has a respectable Relative Strength Rating (a proprietary factor used by William O’Neil + Co. to measure a stock’s strength relative to the market) despite being in a poorly rated industry group, and it should continue to stand out within its group should an infrastructure bill move forward.
Other stocks to watch include Fluor FLR (FLR), KBR KBR (KBR), James Hardie JHX (JHX), Steel Dynamics STLD (STLD), Advanced Drainage Systems (WMS), Arcosa (ACA), Ashtead Group (AHT.GB), Generac (GNRC), Rockwell Automation ROK (ROK), Nordson NDSN (NDSN), Union Pacific UNP (UNP), and Arconic (ARNC).
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I am Chief Investment Officer for O’Neil Global Advisors (OGA), a subsidiary of O’Neil Capital Management, an Investment Advisor that develops systematic equity trading strategies using quantitative modeling and algorithms. I previously served as Chief Investment Strategist of OGA affiliate William O’Neil Co., an independent advisory firm providing global buy and sell recommendations, independent research, and custom advisory to many of the world’s leading institutional investment managers. I have managed numerous long-only and long-short hedge funds, mutual funds, and institutional accounts and overseen investment teams at Folger Hill Asset Management, Freedom Capital Management, Westfield Capital Management, and The Boston Company. I am a Certified Financial Analyst and am regularly featured on Reuters TV, Bloomberg Radio, CNBC, and Fox Business.