The U.S. Senate passed a $1 trillion infrastructure bill on Tuesday, setting the stage for funds to flow to transportation-infrastructure improvements, water and power-facility updates, and 21st-century priorities such as expansion of broadband access and attempts to address climate change. As the bipartisan bill heads to the House of Representatives, another $3.5 trillion reconciliation bill, backed by Democrats only, could follow, with spending focused on “human infrastructure” like child care, education funding, and a Medicare expansion, plus additional climate-related measures.
Infrastructure-related stocks, from asphalt makers to construction-machinery companies, have rallied sharply in anticipation of the bills’ passage, and added to their gains on Tuesday. The
exchange-traded fund (IFRA) was up 1.2% in midday trading, versus a 0.2% rise for the
Few bargains remain. Moreover, spending will be spread over many years, and the trillion-dollar headline number isn’t all that new; $550 billion of the price tag comes from previously unallocated funds.
(SUM), which make concrete, cement, asphalt, and other traditional construction materials, are up 40% or more in the past year, bolstered by a strong housing market and demand for new warehouses and distribution centers, in addition to expectations for more infrastructure spending. The stocks now sport rich valuations; Vulcan trades for close to 32 times next year’s expected earnings, versus a long-term average of less than 27, while Martin Marietta has a price/earnings multiple of 28.
Investors looking to prosper from a deluge of spending might do better to focus on shares of engineering and inspection firms, such as
(TTEK), Parsons (PSN),
(ATCX). These companies tend to be hired at the start of new projects, to sign off on designs and contribute to feasibility studies. Infrastructure funds could begin to show up in their revenues before shovels get in the ground, possibly as soon as next year.
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Jacobs, for example, provides engineering and design consulting and other technical services for power, water, and transportation-infrastructure projects. “J’s infrastructure design exposure is on the front end of actual sustainability projects across renewables, electric grid upgrades, hydrogen transportation, and net-zero designs,” Benchmark analyst Josh Sullivan wrote in a recent report.
Sullivan sees double-digit profit growth for Jacobs next year, and rates the stock a Buy with a $160 price target, about 24% above Friday’s close of $128.79. Eighty-eight percent of analysts covering Jacobs recommend the shares, which trade for 18.4 times forward earnings—below the market average.
|Atlas Technical Consultants / ATCX||$13.78||59.3%||$0.5||16.7|
|Jacobs Engineering Group / J*||128.74||39.8||16.8||18.3|
|Montrose Environmental Group / MEG||50.13||108.4||1.3||227.9|
|Parsons / PSN||33.09||-6.8||3.4||15.6|
|Tetra Tech / TTEK*||135.54||48.0||7.3||33.2|
*Fiscal year ends in September; E=estimate
The largest single item in the 2,700-page Infrastructure Investment and Jobs Act is $110 billion for roads, bridges, tunnels, and other major projects. Another $66 billion would go to passenger and freight rail, $39 billion to public transit, $25 billion to airports, and $17 billion to ports and waterways.
All this spending will also be a boon to construction-machinery companies—if they can handle it. Industrial and construction activity has been booming, and supply chains are stretched. “We already are seeing stronger heavy construction activity; it’s something we saw in the second quarter, and we expect that improvement to continue,”
(CAT) CEO Jim Umpleby said on the company’s second-quarter earnings call. “That is irrespective of an infrastructure bill in the United States being passed.”
Companies such as
(MTW) likewise are benefiting from a red-hot construction market. Federal infrastructure spending would be incrementally positive for them. The same goes for
(WSC), which rent out construction equipment. But their shares, too, are trading at valuations that leave little room for error.
Water infrastructure gets $55 billion in the draft bill, aimed at replacing lead pipes, improving filtration systems, and cleaning up drinking water at schools and homes.
) are two companies to watch; they sell treatment equipment, pumps, valves, and provide related services.
(HUBB) could see additional revenue, due to the $65 billion allocated to power infrastructure. But, again, it’s not a game-changer for the stocks.
Finally, the bill includes $7.5 billion for electric vehicle infrastructure, including $2.5 billion for charging. That’s not much relative to other allocations, but it is meaningful for a nascent industry. Newly public EV charging companies such as
(BLNK) are expected to have combined sales of less than $200 million this year. Expect sales to grow if the Democrats’ reconciliation bill passes; it includes hundreds of billions of dollars in additional climate-change-related spending, which could boost EV adoption.
exchange-traded fund (IFRA) has returned 47% in the past year, about 13 points ahead of the S&P 500. Assuming the infrastructure bill passes the House, investors will have to choose their spots carefully.
Write to Nicholas Jasinski at [email protected]