These 3 Infrastructure Stocks Could Finally Have Their Day

Multiple stacks of coins on top of a graph Credit: Shutterstock photo

President Trump's $1.5 trillion infrastructure plan introduced in February disappointed policymakers on both sides of the aisle.

The headline price tag was too much for fiscal hawks and the paltry $200 billion in direct federal spending wasn't enough from the perspective of state and local governments. It may not have mattered because enthusiasm for new fiscal spending had already become extremely light after the $1.5 trillion tax cut package.

However, signs are pointing to a change in the environment, and infrastructure stocks could get a big boost very soon. Not only is crumbling infrastructure making headlines, but rare bipartisan support is coming together to drive enthusiasm for a spending package.

The group has largely missed the run-up in prices seen in the broader market over the last five years as infrastructure spending stagnated. Leaders are trading at discounts to long-term price multiples and could play catch-up on any new spending plan.

Infrastructure Spending Is Shovel-Ready And Could Be Back On The Agenda

Infrastructure spending has long been lower than replacement needs, but the last five years have lagged even further.

Annual federal spending for major public infrastructure has fallen 17% over the five years through 2017 to $38.4 billion. Federal grants for infrastructure spending boomed to 3.5% of total outlays in the 1960s but have averaged less than 1.6% over the last three decades .

Spending at the state and local level mirrors federal outlays with infrastructure spending dropping from a high of 3% in the late 1960s to around 2% of GDP since the 1980s.

The lack of investment is catching up to us, with America's bridges and highways getting a D+ rating in the most recent report by the American Society of Civil Engineers (ASCE). Just 55% of the necessary $4.6 trillion needed through 2025 to bring the nation's infrastructure up to a B rating has been committed. It's estimated that road and bridge repairs alone require $1.1 trillion more than has been committed.

Infrastructure needs are making headlines more frequently with crises like the Flint water emergency and multiple bridge failures across the country.

It's not only America's infrastructure that is in disrepair. The Global Infrastructure Hub, a G-20 initiative, estimates that $94 trillion will need to be committed through 2040 to maintain global physical capital.

Opposition to federal spending for infrastructure could weaken after the November midterms.

Infrastructure is one of the few programs with bipartisan support and the potential for Democrat-control of the House could renew the push for a package. Both Republicans and Democrats may look to infrastructure as a point of progress in an otherwise contentious climate.

Economic growth could provide the final impetus to an infrastructure plan. The Federal Reserve Bank of Atlanta estimates first-quarter GDP at just 2% through its GDPNow tracker. The OECD estimates U.S. growth in 2018 of 2.5% will slow to just 2.15% next year. That's far below promises made by Washington when promoting the tax cuts and politicians will be looking for ways to boost the economy.

3 Infrastructure Stocks To Rebuild America

The need for greater infrastructure spending is widespread, ranging from utilities to transportation networks and energy. While it's difficult to predict what any new spending will target, headlines like those out of Flint and the nationwide crumbling of our transportation infrastructure will surely push money that way.

The large, diversified engineering and construction companies should do well in this environment. Disappointed in the lack of a new spending bill, investors have avoided the group and many of the best names are trading at discounts to long-term valuation multiples.

Fluor Corp (NYSE: FLR ) is one of the largest firms in the industry and has used that size to go after the largest contracts. Fluor has the largest single support services contract to the U.S. military and is able to service many projects that its smaller competitors cannot handle.

The company reported a backlog of $30.9 billion in the last quarter, representing more than a year and a half worth of revenue with 42% for U.S. contract work. Approximately half of the company's revenue comes from energy, chemicals, and mining projects.

Earnings are expected to double to $3.30 per share this year on strength in U.S. energy production and pipeline projects. Shares trade for 18 times expected earnings for a 23% discount to the five-year average multiple.

Jacobs Engineering (NYSE: JEC ) recently closed its $3.3 billion acquisition of CH2M, which gives the firm a scale advantage in environmental cleanup and increases its capabilities across infrastructure. Jacobs is particularly strong in the aerospace and technology segment, closing multi-year awards last year for NASA and the Missile Defense Agency.

The company reported a backlog of $19.6 billion in the last quarter, representing 1.3 times annual revenue. Shares trade for 14 times expected earnings which are forecast to increase 30% this year to $4.32 per share. That forward P/E ratio is a discount of 38% on the five-year average multiple.

Chicago Bridge & Iron (NYSE: CBI ) is expected to close its $6 billion all-stock merger with McDermott (NYSE: MDR ) in the second quarter of this year to create a powerhouse in onshore and offshore energy infrastructure. The combination will make the company the sixth-largest infrastructure firm by revenue and give it the scale to compete. Shareholders will get 2.47 shares of MDR for every share of CBI.

The combined company will have a backlog of $14.5 billion, nearly 1.5 times annual revenue. Just over half (55%) of the combined revenue is expected from U.S. projects across energy, utilizes, chemicals and mining.

Shares of Chicago Bridge & Iron trade for just 9.3 times expected earnings of $1.62 per share this year, while McDermott trades for only slightly more at 12.4 times expected earnings. If the company is able to realize just some of the benefits to the merger, shares could jump as the price multiple moves closer to the industry average.

Risks To Consider : Budget hawks in Congress could still freeze talks for more infrastructure spending, even as momentum builds for a program.

Action To Take : Position in best-of-breed infrastructure companies ready to take advantage of any new fiscal spending this year and next.

Editor's Note : You might think Tesla would be Elon's cash cow... but it's not. You'll be surprised to find he's got his eyes on an even more lucrative endeavor. One that's potentially bigger than GM, Toyota, and even Apple... combined. Click here to grab a piece this trillion-dollar golden goose for yourself .

Related Articles

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2016 StreetAuthority, LLC. All Rights Reserved.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.