Some of the best investments are right in front of us every
day. Yet they're often overlooked because they're so much a part
of our daily lives they don't register with the conscious
#-ad_banner-#One area investors may underappreciate is
infrastructure -- things like telephone poles, towers for
wireless communication, substations for electric utilities, and
guard rails along roadways, to name just a few. Although
infrastructure is the very foundation of society, I suspect it's
probably far from the first thing on investors' minds.
However, I expect it to be an excellent investment in coming
years. In the U.S. and other developed countries, infrastructure
has been neglected for so long it now needs some heavy-duty
overhaul. Many areas of the emerging world have little or no
infrastructure at all and will need tremendous amounts put into
place for the first time.
According to the McKinsey Global Institute, as much as $67
trillion in spending on infrastructure of all types will be
needed worldwide between now and 2030. Roads and power grids will
be in greatest demand, followed by water utilities and
telecommunication networks, the Institute says. In the U.S., an
estimated $2.2 trillion of infrastructure spending will be
necessary during the next five years alone.
Exactly how much of this spending will actually occur is
anybody's guess, considering what a hard time the U.S. and other
governments have coming to budget agreements. However, I'd be
surprised if global infrastructure outlays weren't well into the
trillions during the next decade. Otherwise, the development of
emerging countries will slow considerably, and the U.S. and other
developed regions will further decay.
If you agree, there's an investment you'll definitely want to
know about -- the stock of a leading infrastructure company that
got its start in farm irrigation equipment in 1946. In addition
to that and the other types of infrastructure I've already
mentioned, the company now also makes traffic signals, galvanized
metals, and high-tension electric and traffic light poles.
I'm referring to
Valmont Industries (NYSE:
, which has increased sales in nine of the past 10 years and
posted an annualized growth rate of 12.4% during that time. As a
result, sales more than tripled to the current $3.3 billion from
$1.03 billion in 2004. Earnings per share (
) are up more than ninefold to $10.35 from $1.10 ten years ago.
Valmont's stock has been awesome, returning 22.7% a year during
the past decade versus 7.1% annually for the S&P 500.
The company has high chances for more outperformance, in my
opinion, because it's already doing extensive business in several
of the main areas where there's a particular need --
telecommunications, power grids, and water provision. Indeed, the
Engineered Support Structures segment that produces communication
towers and telephone poles currently generates annual revenue of
nearly $900 million and has been growing at a solid 6% pace in
recent years. So the segment's sales should easily exceed $950
million this year and could soon be doing more than $1 billion of
The utility support structures segment, which makes concrete
and steel substations and power transmission poles for electric
utilities, has been Valmont's fastest-growing operation lately,
thanks to increasing volumes and declining costs. Annual sales in
this segment are up more than 20% a year during the past few
years to the current level of $960 million. Going forward, they
could keep rising at a similar pace as global electric power
demand continues to soar.
Sales have been climbing at 15% pace in the irrigation
segment, which is now more than an $880 million-a-year business.
Along with the utility support structures segment, irrigation
should continue growing quickly, particularly in developing
markets where limited water supplies should create excellent
demand for the irrigation systems needed to support livestock and
grow food for ballooning populations.
However, I don't mean to suggest the segment will be weak
domestically -- quite the opposite, in fact. Although the issue
is often swept under the rug, water scarcity is a major issue in
North America. California and other parts of the West Coast, for
instance, are in the midst of what could be the area's worst
drought in 500 years, according to some researchers.
The impact has been huge. For instance, farmers in Nevada
aren't bothering to plant crops since there's little chance
they'll grow. Ranchers in Northern California and New Mexico have
had no choice but to sell off cattle because grazing fields are
barren. Issues such as these clearly spell opportunity for
Valmont's irrigation business and should contribute to record
sales for the segment in the future.
Risks to Consider:
As an infrastructure provider, Valmont often deals with the
public sector and government agencies, which have been more
tightfisted with their budgets in recent years and may decide to
cancel or delay many infrastructure projects.
Action to Take -->
Valmont is a top stock to buy for the coming global
infrastructure boom and should provide attractive shareholder
returns for many years. Consensus estimates are for 11%-a-year
EPS expansion for the next five years to about $17.40. This
implies 88% upside from the current stock price of about $148 to
$278 within five years, based on a historical price-to-earnings
(P/E) ratio of 16. With a current P/E of 14 and a forward P/E of
12, shares appear to be a very good value right now.
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