Sandy's False Profit

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are no shortage of articles listing "x Stocks to Gain on Hurricane Sandy", but is there anything amongst the list of stocks which might offer something beyond the quick fix?  Jim Cramer made a good point in that it's too late to be buying hurricane stocks, unless they make sense as a long term investment.  Rebuilding infrastructure following natural disasters takes time and large amounts of taxpayer money, and is nearly always more expensive than initially projected.  But what is bad for the taxpayer becomes a “bonus” to beneficiaries of this money.

So, which companies will be getting a slice of this pie? 

ForbesSchaeffers, and TheStreet all offered suggestions as to what will hit (or miss) in the weeks and months ahead.  All three plugged for the traditional Home Depot and Lowe's, but these are probably too familiar, and therefore past their optimum buy point as a hurricane play.  However, Forbes did include a couple of engineering and construction firms, offering a different slant on the aforementioned DIY suppliers. The two stocks mentioned, Fluor Corp (NYSE: FLR) and Granite Construction (NYSE: GVA), provide construction services to Federal and Municipal governments, ideal candidates to benefit from the large infrastructure projects available post-disaster.   

However, finding the right candidates to invest in doesn't necessarily mean now is the time to buy.  When Irene hit the north east coast at the end of August 2011, both Fluor Corp and Granite Construction would have looked like ideal buy candidates.  Total damage by Irene was set at $19 billion, with $15.6 billion alone attributed to damage in the U.S.  Despite Irene's ranking as the 5th costliest hurricane, it wasn't enough to tempt buyers of all construction stocks; while Granite Construction saw gains, Fluor struggled.  Hurricane Sandy is projected to have costs of between $35 and 45 billion (Katrina came in at $100 billion), but will it make a difference?

Fluor was not a beneficiary when Irene hit during the third quarter, actually earnings were down on expectations.  No reference was made to projects attributable to Irene, as focus fell on the seven Fluor employees killed in Afghanistan.  A failed wind farm project was attributed to the miss. The disappointing numbers contributed to selling, which left the stock in worse shape after Irene hit.  Fourth quarter also saw a revenue miss, but it did beat on earnings.  During the fourth quarter conference call, a reference was made to $26 billion in new business in its mining & metals business, but there was no Irene based projects, and the company remained cautious on the benefits from the then upcoming Highway Bill. None of this would suggest a rosy endorsement for any post-Sandy work from the government.   Although, Fluor projections for this year's upcoming third quarter are better, with a 24% rise for earnings per share predicted compared to last year.  So it may appear to benefit from Hurricane Sandy, without actually doing so!

It's a different story for Granite Construction.  It trounced (then) estimates for its Irene-centered quarter.  The stock had been ticking higher prior to earnings, so the announcement was icing on the cake for investors.  Like Fluor, it had a healthy backlog of projects to work through.  It handily beat again for fourth quarter, which offered a further price surge, but was hit hard on its next earnings release, which sent the stock sharply lower.  There was no specific mention of Irene-related projects, despite the large number of public money projects it carries.  The stock's municipal and federal development focus is more geared towards California and Texas, although it did have some pre-Sandy contract work in Queens.  Figures attributed 83% of its revenues to Government spending at some level, so if spending was to drop substantially, e.g. if tax revenue was to fall, then things could get sticky like it was in Q1.

Government spending was weak in Q4 of 2011, and post-election it's likely to remain so for the rest of the year.  Next year is unlikely to be much different, as the post-election year is not known for big government spending, and this could hamper both Fluor and Granite Construction.  A Republican victory in November could see added pressure on these companies.  However, the $105 billion Highway bill was signed into law in July, and projects from this will start hitting books soon enough.  So while investors may be expecting a wave of recovery spending in the wake of the hurricane, in practice, this is looking unlikely to happen.  Those looking for hurricane plays will have to dig a little harder to find them.

fallond has no positions in the stocks mentioned above. The Motley Fool owns shares of Fluor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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