Chinese Bridges are Falling Down, Falling Down
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And the Chinese people are none too happy about it.
According to the official Xinhua news agency, the collapse of the Yangmingtan Bridge in late August 2012 is the sixth major bridge to collapse in the People's Republic of China since July 2011. Even more bridges have crashed since 2007. The government's official response is that overloaded trucks are to blame. Well, the Chinese are not stupid and that "overloaded trucks" line is a dog that just won't hunt. Many believe the blame lies with the Chinese government's rush to build infrastructure projects during the Great Recession to help prop up the Chinese economy. Corruption is also frequently suspected. Industry analysts say the rapid speed in which these bridges were built, coupled with a shoestring budget, were an invitation to disaster. Who can blame the Chinese people to question the quality of their recently built transportation infrastructure?
If the Chinese government decides to bring in outside help to rebuild its bridges and train lines, one company that could benefit is AECOM (NYSE: ACM). The Sutong bridge east of Shanghai, built in 2003 and arguably the longest cable stayed bridge in the world, is still standing. In fact, in 2010, it won the Outstanding Civil Engineering Achievement Award from the American Society of Civil Engineers. ACM was a major contractor during its construction. The Hong Kong Chamber of Commerce recently gave ACM an award for innovation and creativity. ACM is already conducting an independent review of the Chongming South Channel Tunnel and will provide additional engineering services for the project. So if Beijing decides to get some engineering help for future building projects, ACM is a known and reliable company to do business with.
Other countries would likely agree. ACM will design the master plan for the 2016 Olympics in Rio de Janeiro having successfully served in the same capacity for the 2012 Olympics in London. The city of Dubai has signed ACM to help build hospitals, including a branch of the Cleveland Clinic, and a premier housing development for citizens of the emirate. Did I mention ACM helped build the tallest building in the world in Dubai? South Africa retained ACM to build its Moses Mabhida stadium for the 2010 World Cup. All in all, ACM is working in 130 different countries. No surprise the company was named one of Engineering News Records top 500 design firms in 2011.
How does ACM look as an investment? A turn-around story of sorts in my estimation. The summer of 2012 was not kind to ACM following a downward revision in its fiscal year earnings estimates in May. In August, the company announced a $300 million stock buyback and a positive earnings report that has boosted the stock. Currently, ACM trades at a PE of around 9.5 and at $21/share is still about 13% below its 52 week high. Return on equity is just over 10% and debt is under control. Most analysts who follow the company are bullish on ACM. It pays no dividend.
In comparison, the Shaw Group (NYSE: SHAW) is another engineering firm that includes Westinghouse and was recently bought out by Chicago Bridge and Iron (NYSE: CBI). Shaw has been losing money in the past 12 months and only the buyout by CBI for $46/share reversed a flat to downward trend in the stock. CBI is a worthy competitor in the energy industry, but despite its name, does not have a significant presence in the infrastructure business. The acquisition of Shaw will change that, but given Shaw's energy portfolio and the declines in its Environment and Infrastructure segments, infrastructure business may be a small player in CBI's world.
Another competitor is URS Corp (NYSE: URS). This firm also deals in transportation and energy. In 2011, the US Army was the company's biggest customer. URS expanded its presence in energy by acquiring Flint Energy Services. This will give URS a presence in the oil sands industry. Earnings took a big hit in 4Q 2011 and profits were below expectations for 2Q 2012. The stock is 25% off its 52 week high and has trended sideways since June 2012. Hopefully the expanded operations in the oil sands business will boost both earnings and stock price.
In case you're wondering, Bechtel is not a publically traded firm.
In 1958, Mao Zedong launched China's "Great Leap Forward," an ambitious plan to modernize Chinese industry and agriculture. It failed miserably. The Great Recession 50 years later prompted the Chinese government to spend billions on infrastructure projects to help keep unemployment down and the economy afloat. The effort succeeded but only in that regard. Quality and passenger safety took a backseat to economic growth. Modern social media and communications prevent the Chinese government from hiding the collapsing bridges and subsequent casualties and social indignation. While the damage and harm are regrettable, engineering firms such as ACM may profit from China's efforts to repair and expand its infrastructure.
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