Cash in on the rebuilding boom
States and cities will spend billions to beef up bridges, roads, utility lines, and other aging infrastructure in coming years. Fortune's Katie Benner found four companies that are poised to benefit.
(Fortune Magazine) -- If you've read our story on Macquarie Bank you know that - regardless of that company's prospects - investors see plenty of opportunities in infrastructure.
Congress and state and local governments are allocating billions of dollars for the repair, renovation, and construction of bridges, roads, mass transit systems, and power grids.
And that means the promise of profits for engineering, construction, and manufacturing companies that win these contracts. "The need, the money, and the political will to take action are all in place right now," says Jim Trozze, founder of research firm Coppell Financial. "And that should create a large number of orders for the next several years."
To find the most attractive infrastructure stocks to buy now, we spoke with value investors and combed analysts' reports and financial statements to find companies that have solid growth potential but are still trading at reasonable valuations. Here's a look at four promising candidates.
Granite Construction (Charts) (GVA, $54), one of the nation's largest civil contractors, specializes in roads, bridges, and mass transit. It figures to be a major beneficiary of Safetea-LU, the 2005 law that provided $244 billion for projects that improve safety, reduce congestion, and protect the environment across the nation.
For example, the company and a partner won a $267 million contract to rebuild the U.S. 90 Bay St. Louis bridge in Mississippi that was destroyed by Hurricane Katrina. It also expects to capitalize on California's Proposition 1B, approved last year, authorizing nearly $20 billion in bonds for transportation spending.
The company expects to see its profit margins improve now that it is wrapping up several large projects that were dogged by cost overruns. The consensus among analysts is that earnings will jump an average 32% annually over the next three years, on revenue increases averaging 6% a year, according to research firm Capital IQ. Granite has little debt and a lot of cash. The stock yields 0.75% and trades at 14 times estimated 2008 earnings, vs. 15 times for the S&P 500.
Roads aren't the only networks that have suffered neglect. The nation's power grid is in dire need of an overhaul, and with electricity consumption increasing rapidly around the world, demand for new construction is surging as well.
One company that does a lot of business both here and abroad is General Cable (Charts) (BGC, $55), which develops, designs, manufactures, and distributes copper, aluminum, and fiber-optic wire and cable products. It is among the top global wire and cable companies and the market leader in the three segments it competes in - energy, industrial, and communications.
Like Granite, General Cable has a law on its side. The 2005 Energy Policy Act gives billions of dollars in tax breaks to energy companies that upgrade their power grids, and it requires them to replace their transmission cables more often. The act also gives tax credits to companies that set up green energy systems, and General Cable is a major supplier to wind farms and hydroelectric plants.
General Cable is aggressively expanding in the developing world, says Ray Haddad, a small-cap fund manager at Putnam Investments, which held 1.3 million shares in June. International sales account for more than half of the company's revenue, and that share is growing. The company plans to invest $30 million in India and China over the next few years. It trades at 12 times estimated 2008 earnings, and analysts believe it could boost profits by 24% and revenues by about 11% annually over the next three years, according to Capital IQ.
Greenbrier (Charts) (GBX, $27) makes and leases railcars that transport everything from grain to liquefied gas. It is the leading manufacturer of the "intermodal cars," which carry the large freight containers used on trucks and ships.
"As international trade grows, we'll see more people use this versatile product," says Edward Maraccini, a portfolio manager at Johnson Asset Management, which owns about 60,000 shares of Greenbrier. "With fuel costs rising, rail also has an advantage over trucking because it uses less gas to transport freight."
Greenbrier recently closed its struggling Canadian manufacturing unit the only part of its business that was not thriving - and increased its railcar-delivery forecast for the entire year. The stock trades at ten times estimated 2008 earnings and offers a dividend yield of 1.2%.
Finally, infrastructure investors may want to look at Wesco (Charts, Fortune 500) (WCC, $48), the nation's leading electrical supplies and equipment distributor. In this highly fragmented market, Wesco and its top three competitors account for only 20% of all sales, but Wesco's aggressive acquisition strategy (29 deals since 1995) has made it the only national player. It has a solid balance sheet and plans to continue buying up smaller rivals.
Because Wesco deals in building supplies, its stock was hammered amid the general worries about the housing slump. But it has limited exposure to the weak residential market.
"They distribute mainly to utilities, governments, and industrial companies - end markets that are still very attractive," says Kent Croft, president of investment firm Croft Leominster, which owns about 117,000 shares. The stock looks cheap, trading at just eight times next year's estimated earnings. Analysts surveyed by Capital IQ say that on average the company will increase earnings by 14% and revenue by 7% annually over the next three years.