The massive government stimulus measures passed by the U.S.
Congress in 2009 and 2010 enabled states to continue their work on
major municipal projects. New highway spurs were completed,
roadbeds were repaved and creaking bridges were shored-up. This not
only provided work for individuals at a time when unemployment
figures were inching up almost by the day, but it made a dent in
improving an infrastructure rated "D" by the American Society of
And then the money ran out.
You can stillspot various projects nearing completion, but any new
projects are now on hold. This has wrought havoc for the firms
providing these civil engineering services. They're laying off
staff and idling equipment, prepping for a slowdown while the
remaining projects in their
get worked off.
But help is on the way. Although there are far-ranging debates
about the size and scope of government spending, both parties agree
our nation's infrastructure cannot afford to markedly deteriorate.
A rising number of bridges are badly in need of repair, and major
roads are in need of fresh asphalt, and it's got everyone's
attention. This is why President Obama included a large amount of
infrastructure spending in his latest $447 billion jobs bill, or
Though other parts of his plan face an uncertain outlook, the
roads-and-bridges part of his proposal is getting serious attention
and should soon provide relief to the beleaguered construction
industry. Here are five stocks that should rebound nicely once the
funds start to flow again.
1. Sterling Construction (Nasdaq:
Sterling does it all: it builds and reconstructs road beds,
bridges, railroad tracks and water transport systems. The company
received a badly-needed boost in 2010 when it snagged a piece of a
$207 million road-building program outside of Austin, Texas. This
is helping sales growth stay positive in 2011 and 2012, and keep
the backlog above $700 million.
But since the spring season,
have been sliding on concerns business will slow sharply after the
backlog is gone and Washington dithers in its decision-making
progress. The stock routinely traded in the $20s in the middle of
the last decade and is now trading under $12. Yet the long-term
view should be in focus here. Sterling has steadily expanded during
the past decade across the U.S. Southwest. This expansion has
helped the company to expand sales at an average of 15% annual pace
in the past 10 years.
When infrastructure spending returns to historical levels (which it
must if the nation is not to lose its economic efficiency), then
Sterling's broadened footprint should help fuel new growth. Back
out the company's $70 million in net cash, and Sterling sports an
of just $125 million, a mere fraction of its $600 million revenue
base. Look for this stock to possibly rebound 50% back to the
when the outlook for infrastructure spending finally brightens.
2. Granite Construction (NYSE:
This company is like Sterling Construction, but with a twist. It
also makes sand, gravel, concrete and other road-building materials
-- for its own use as well as industry peers. This diversifies the
sales mix and also lowers its own material costs. Yet also like
Sterling, Granite Construction has fallen out of favor on fears of
a coming stoppage in infrastructure efforts.
D.A. Davidson's analysts think Granite's "shares are substantially
undervalued relative to the growth prospects over the next several
years," and expect shares to trade from a current $20 to $30 in 12
months and up to $60 in the next five years. The
for this stock is improved visibility into the outlook for
infrastructure spending in coming years. Once this clarifies, the
stock should start to move up off its current lows.
3. Vulcan Materials (NYSE:
4. Martin Marietta Materials (NYSE:
These two stocks are quite similar, producing "aggregates," or the
raw materials that go into roads. Each stock has fallen well of its
52-week high in recent months. Martin Marietta Materials remains
profitable, even in a tough
and is likely the safer choice of the two. This means if Vulcan is
able to restore its
margins back to industry norms (gross margins have fallen from 29%
in 2007 to a recent 12%), then its shares could rebound even more
aggressively, relative to Martin Marietta Materials.
5. Jacobs Engineering (NYSE:
Investors may not want to depend solely on Washington's lead to
re-stimulate infrastructure spending. To offset the risk of
Washington simply failing to agree on any package, you can focus
instead on this major contracting firm, which has considerable
exposure to roads and bridges, but also serves the oil and gas
industry. Jacobs has also sought to reduce its dependence on the
United States, deriving an increasing amount of business from
clients in Europe and Asia.
Even in terms of infrastructure, Jacobs is a bit differentiated
from the companies mentioned above. Roughly half the company's
revenue comes from project services such as engineering, design,
Jacobs actually felt the global downturn earlier than others, due
to its strong exposure to Europe (sales fell roughly 15% in fiscal
(September) 2010 to around $9.9 billion). But recent contract wins
have boosted backlog and sales are again moving higher. Sales in
the quarter ended July rose 9% from a year ago, stemming an
eight-quarter losing streak. Per share profits of $0.71 were about
25% above year-ago levels. Don't look for a sudden slowdown either.
Backlog now stands at $14 billion (equating to more than four
years' worth of revenue). Any boost in infrastructure spending
would only add to this pile. Shares, trading at less than 12 times
projected fiscal 2012 profits, are a fairly modest value in
relation to the
underway on the
Risks to consider:
Counting on Washington to agree on anything has been a losing
proposition thus far this year. Yet a boost to infrastructure
spending is looking increasingly likely.
Action to Take -->
These are highly cyclical stocks, moving up or down in anticipation
of business trends to come. They've all sold off sharply this
summer as the infrastructure spending outlook has weakened. As the
outlook hits bottom and visibility increases on an eventual
spending rebound, these stocks should rebound in tandem. Any one of
these stocks would be a good pickup to play this trend, depending
on your goals and risk tolerance.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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