Marcial: Building a Case for Infrastructure Stocks
The long-depressed infrastructure and construction-related companies—the suppliers of sand and gravel, stone and cement, as well as makers of boom trucks, forklifts, and cranes—are suddenly getting a big boost. Wall Street's disdain for anything that's somehow related to housing has pulverized this sector. Enter President-elect Barack Obama and his job-creating, massive public works program.
The incoming chief executive's promise to make it his top priority to create 2.5 million jobs through a gigantic infrastructure and public works program lit a fire under some infrastructure stocks. In what he bills as the biggest such program since the construction of the interstate highway system in the 1950s, Obama vows to quickly rebuild and rehabilitate the nation's roads, highways, bridges, and schools, with the effort starting as soon as he is sworn in on Jan. 20.
Wall Street analysts have been slow to react to the significance of this kind of spending on road-building and construction stocks. In fact, some of them haven't changed their cautious ratings of "neutral/hold" or sell on some of these downtrodden stocks.
But some investment management advisers have started turning bullish on the group, trying to persuade clients to get ahead of the crowd in snapping up infrastructure shares.
"Equity portfolios should be positioned to take advantage of owning beneficiaries of the massive infrastructure spending from the domestic and global stimulus programs," says Arnold Schmeidler, CEO of investment management firm A.R. Schmeidler in New York.
an opportunity "not to be missed"
The greatest challenge for professional investors, he says, is to position their portfolios for the downside risks existing today, "while at the same time being able to participate in the rapid moves that will inevitably come with the return to a more normal functioning of the financial markets." The gargantuan government spending that's coming for infrastructure projects is one of those opportunities not to be missed, advises Schmeidler.
At a meeting in early December between President-elect Obama and U.S. state governors, $136 billion worth of infrastructure projects were identified by the governors as "ready to go" and put in place within 180 days. Some 70% of the spending is designated for highway and bridge construction projects. Each year, total public construction spending amounts to roughly $316 billion, with street and highway projects eating up $82 billion of that amount, says Dan McGoey, building materials analyst at Deutsche Bank (DB).
As a result of Obama's discussions with the governors, shares of some infrastructure stocks have started creeping up, among them Texas Industries (TX), a major maker of structural steel and specialty steel bar products, cement, and concrete products; Martin Marietta Materials (MLM), the second-largest U.S. producer of construction aggregates; Vulcan Materials (VHM), the largest producer of construction aggregates in the U.S., and producer of asphalt and concrete; Cemex (CX), Mexico's largest cement producer whose stock trades on the Big board; and Manitex (MNTX), a builder of boom truck cranes, rough terrain forklifts, and vehicles.
Shares of Caterpillar (CAT), the world's largest producer of earth-moving equipment, have also turned up, as well as those of Terex (TEX), which makes a broad range of heavy-duty trucks and cranes. Shares of Manitowoc (MTW), also a maker of heavy cranes, have climbed as well.
takeover potential, too
Texas Industries has risen from 21 a share on Nov. 20 to 34 on Dec. 12. That is still way below its 2008 closing high of 80.35 on Apr. 29. It is one of the infrastructure stocks that is still ignored by analysts. Only two of 10 analysts Bloomberg monitors have a buy on the stock, while seven rate it a hold. One analyst rates it a sell. To the contrarians, that is a positive factor because it suggests the stock is still an undiscovered or underplayed issue.
Daniel Galindo, an analyst at investment firm Gabelli & Co. (GBL), is one of the bulls and rates it a buy, based on Texas Industries' much higher estimated intrinsic worth and its value as an infrastructure play.
Lately, there has been increased buying in the stock based on a noninfrastructure reason: takeover potential. Its largest shareholder, NNS Holding, which owns a 15% stake, wants to boost its holdings in Texas Industries, but the board rejected the request, along with its request for representation on the board. NNS claims the company is not performing adequately.
That potential fight for control is one reason why Gabelli is interested in the stock. Shamrock Group, a firm that invests in potential takeover stocks, reported in November that it has taken a 5.5% stake in Texas Industries.
Vulcan Materials is another stock that is quite unloved by Wall Street analysts. Only one of the 12 who follow it has a buy recommendation, while seven rate it a hold and four recommend selling the stock, according to Bloomberg. Nonetheless, the stock leaped after the Obama announcement of an infrastructure plan, climbing from 40 a share on Nov. 11 to 67 on Dec. 12. The stock hit a high of 90 on Dec. 11, 2007.
One recent strike against Vulcan was its third-quarter sales results, released on Nov. 5, which failed to meet expectations.
good old cement
Martin Marietta's stock has climbed from 60 a share on Nov. 20 to 96 on Dec. 12. It traded as high as 135 on Dec. 24, 2007. The stock has jumped even though only two out of 12 analysts rate it buy. Nine analysts peg it a hold and one a sell. Analyst Jason Smith of independent investment research outfit Value Line (VALU) says Martin would be at the "forefront once a recovery grabs hold."
Cemex, which traded as high as 32 on May 19, dropped to a low of 4.10 a share on Nov. 21, but it snapped back to 8 by Dec. 12, in part because of the infrastructure spending plan. Deutsche Bank's McGoey, who rates Cemex a buy, figures the Mexican firm, as the largest cement producer in the U.S., will definitely benefit from the Obama infrastructure program.
The company's output in America accounts for 14% of the total U.S. production capacity. The stimulus package, he says, would roughly increase sales by 10% in the U.S., and could increase its earnings before interest, taxes, depreciation, and amortization (EBITDA) by 15% to 25% in 2009. Deutsche Bank owns Cemex shares and has done business with the company.
One thing going for Cemex is rising cement consumption worldwide. With operations in more than 50 countries, it is expected to continue benefiting from that strong demand. "We expect global cement consumption to remain strong," says analyst Erik Antonson of Value Line, who follows Cemex. Once the homebuilding industry straightens itself out, which he figures may take several more quarters, "Cemex and its shareholders will benefit considerably," he adds. In the meantime, the massive stimulus package should start kicking up the stock, as it already has.
a hoist for crane makers?
Even before Obama's announcement of his infrastructure spending plan, analyst Richard Hoss of Roth Capial Partners, who rates Manitex International a buy, had predicted a recovery in the sale of cranes on expectations of an economic recovery. Shares of Manitex had plunged, from a high of 8.20 a share on Dec. 13, 2007, to a recent closing low of 97¢ on Dec. 12. Hoss figures the stock is worth 3.50.
"We believe the shares at [their] current level are meaningfully undervalued, trading at approximately 50% of the company's book value," says Hoss.
"Products such as our boom trucks and cranes are ideally suited for the road, highway, and school-building construction projects being proposed," says Manitex President and Chief Operating Officer Andrew Rooke,
Exclusive of the benefits that may come from the infrastructure program, Hoss forecasts Manitex will earn 21¢ a share in 2008 on estimated sales of $107.1 million, 30¢ a share in 2009 on sales of $120.4 million, and 40¢ on sales of $121.5 million in 2010.
With the damage that the recession and financial crises have wrought on the capital markets, infrastructure stocks could be a good way to repair and rebuild investors' depressed portfolios.