Shares of companies such as Granite Construction Inc. (GVA) and Aecom Technology Corp. (ACM) have outperformed the broader market since June as a $105 billion transportation bill is boosting the industry.
While Congress and President Barack Obama have yet to agree on how to avert more than $600 billion in tax increases and spending cuts set to take place next month, a 27-month deal they reached this summer to keep road, bridge and transit spending at current levels through September 2014 will serve as a catalyst for businesses involved in rebuilding U.S. infrastructure, said Andrew Wittmann, a former engineer who is now an analyst at Robert W. Baird & Co. in Milwaukee.
“Big projects are coming,” making transportation one of the “pockets of strength” in U.S. engineering and construction, Wittmann said. “These stocks can be very attractive for long-term investors” willing to bet that a backlog of work funded by this legislation will increase, translating into faster revenue growth, he said.
The bill underscores Obama’s pledge to reinvigorate the economy and boost employment through investment in transportation programs. It has provided some certainty for companies, reflected by sentiment that “continues to improve” among executives at Fluor Corp. and Jacobs Engineering Group Inc. (JEC), even as possible austerity measures could be a drag on other industries, Wittmann said.
These types of stocks are trading at a “pretty big discount” to historical valuations on a price-to-earnings basis: about 13.5 times, compared with a multiple of about 15, he said.
The legislation “clearly is a major positive for this group,” said Marty Leclerc, principal, chief investment officer and portfolio manager at Barrack Yard Advisors in Bryn Mawr, Pennsylvania, which oversees $350 million in assets. While his fund doesn’t currently hold any of these companies, he’d consider buying Irving, Texas-based Fluor -- which closed at $59.53 (FLR) yesterday -- if the price were to drop, he said. “It’s a good, long-term name you can sink your teeth into.”
Even so, Leclerc needs a “margin of safety” to invest in this industry, he said. Companies with operations in developing countries and those involved in the U.S. “energy renaissance” are especially attractive for investment because improved demand in these end-markets isn’t fully “reflected in the price of these stocks yet.”
Meanwhile, a “moderate pick-up” in U.S.-based transportation projects already has boosted shares of Fluor, Jacobs Engineering, Granite Construction, Aecom Technology and URS Corp. since the summer, said Andy Kaplowitz, an analyst in New York at Barclays Plc. These stocks have averaged a 26 percent gain since June 29, when the bill was approved by Congress, compared with a 6 percent rise in the Standard & Poor’s 500 Index.
“I wouldn’t go so far as to say the market is healthy again, but it is improving off a low base,” Kaplowitz said. A team led by Fluor was selected Dec. 17 by the New York State Thruway Authority and the New York State Department of Transportation to replace the Tappan Zee Bridge over the Hudson River with a proposed bid of $3.1 billion.
“We haven’t really seen projects like this in a while,” Kaplowitz said, adding that the number of bids has improved “pretty significantly” this year. That’s in part because such programs are “late cycle” activity that doesn’t show signs of a rebound until a recovery is well under way, given the time required for planning, approval and construction, he said.
The economy expanded at a 3.1 percent annual pace -- more than previously reported -- in the third quarter, the 13th consecutive rise since the 18-month recession ended June 2009.
As a provider of technical and management-support services in this industry, Los Angeles-based Aecom Technology is “cautiously optimistic about the entire transportation market” because of the bill, Chairman and Chief Executive Officer John Dionisio said on a Nov. 13 conference call.
Similarly, demand at Fluor, the largest U.S. publicly traded engineering and construction company, “remained solid and a number of bids have been submitted that could have a meaningful impact over the next several quarters,” Chairman and Chief Executive Officer David Thomas Seaton said on a Nov. 1 conference call.
Construction spending on transportation, highways and streets is growing, based on figures from the Department of Commerce. Estimates of expenditures including the cost of labor and materials, architectural and engineering work, interest and taxes rose 3 percent to $118.3 billion in October on a seasonally adjusted basis, the seventh straight month of gains. November data is scheduled to be released Jan. 2.
While the budget negotiations in Washington have been a drag on investment in the broader U.S. engineering and construction industry, projects that are “making the nation better” -- such as transportation -- are less prone to partisanship, Wittmann said, adding that the bill passed in June also provided funding through public and private partnerships.
If Congress and Obama can agree on a deal to avert the so-called fiscal cliff, this will clear up some uncertainty that has affected financing from these partnerships, Kaplowitz said.
The availability of state and local funding for new highway and transit programs is benefiting San Francisco-based URS, according to Chairman, President and Chief Executive Officer Martin Koffel. The company, which was awarded a $46.6 million street-car design-build contract this year in Atlanta, sees “more buoyancy next year” as a recovery appears to be taking shape, he said on a Nov. 6 conference call
Other new projects, including “several large highway-related programs” are helping to “replenish” the company’s work plans for the coming year, Robert Zaist, president of URS’s energy and construction unit said on the same call. “We’re happy with the pipeline that we have out in front of us.”
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