The Roads Less Traveled

The market looks solid. The trick is to ferret out affordable stocks with strong growth prospects

Collapsing bridges, pipeline explosions, rolling blackouts. You don't have to look far to appreciate the need for colossal investment in infrastructure projects throughout the U.S. In China and India, annual economic growth of 9% to 11% has been driving the same need for construction, while Europe has been privatizing public roads and water treatment plants for the past 15 years. For investors, opportunities include everything from cement manufacturers to owners of airports and parking lots.

The trick now, with the sector hardly undiscovered, is to ferret out stocks that are reasonably priced based on growth prospects. Given the long legs of the infrastructure boom and the growing need for projects, there should be room to run for the stocks and the funds that invest in them. While most people think of infrastructure as asphalt and steel, opportunities stretch all the way to the tech sector.

A relatively cheap way to own some of the top global construction and engineering stocks is through the iShares S&P Global Industrials Sector Index Fund (EXI). Among its biggest holdings: General Electric (GE), Siemens (SI), and United Technologies (UTX). The fund, which tracks the S&P Global Industrials Index, was up 14.8% for the year on Dec. 14, says Morningstar (MORN). James Dunigan, chief investment officer at PNC Wealth Management (PNC), thinks "there's still room for meaningful outperformance over the [Standard & Poor's 500-stock index]" in the months to come. He expects a high-single-digit to low-double-digit return in 2008.

A more concentrated play comes from one of the stocks in the iShares fund, United Technologies. The conglomerate, which makes heating, ventilation, air conditioning equipment, elevators, and security systems, is a good way to buy into the building boom in Asia. While rivals will be busy integrating acquisitions over the next few years, the company already has an extensive array of products and services in key markets. A report from independent research firm Sterne, Agee & Leach estimates that its operating margins, now 13% to 14%, could approach 20% by early in the next decade. The stock trades at 77, and Sterne analyst Nicholas Heymann thinks it can go to 95.


Other opportunities emerge out of the energy sector. With oil in the $90 to $100 range, projects that seemed too costly in the past, such as getting oil out of the Canadian tar sands, make more sense. One company in the thick of it is Jacobs Engineering Group (JEC), which provides engineering and construction services. Jacobs is getting lots of work from those looking for oil in remote areas such as the tar sands.

The company is also getting better contract terms by pricing its services competitively, so it doesn't put too much pressure on clients' margins, a recent Bear Stearns (BSC) report noted. Major chemical makers, as well as the U.S. government, keep hiring Jacobs for new projects. At 95, the stock has a lofty p-e ratio of 32, but S&P analyst Stewart Scharf says the company deserves to trade at a premium to its peers' p-e of 25. His reasoning: promising growth prospects and a low-risk business model based largely on cost-reimbursement contracts.

A less visible side of the boom is found in tech. Emerson Electric (EMR) has led the pack in providing wireless controls for refining, pharma, food, and other industries that allow plant operators to better monitor and control production. The company is expanding into emerging markets and setting up manufacturing sites in low-cost countries. Last year, 23% of sales came from emerging markets, where growth is expected to average at least 12% to 14% between 2007 and 2009. Emerson trades near a 52-week high, but its p-e is closer to the low end of its 10-year average.

While many infrastructure companies are near their highs, Cemex (CX), the Mexican building-materials company, at 26.35, is near a 52-week low. It's been hit by worries about U.S. homebuilders, who are big customers. But Citi Investment Research analyst Stephen Trent says a recent acquisition, Rinker Group, expands Cemex's product line, which should enable it to smooth out its earnings stream.

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