Infrastructure: The Expensive Necessity of Modernity
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Infrastructure is just a fact of modern society. Much has been made of emerging economy infrastructure spending. In my opinion, the reason these get so much interest is because emerging economies are actually spending money on infrastructure. Yes, that might be an obvious statement but stick with me. It is far easier to gird yourself against big expenditures if you are lacking something. If you do not have a road or have only a dirt road, it is far easier to commit to building a highway. If on the other hand you have a highway built 50 years ago it is harder to spend large amounts to get a gleaming new one. Instead you walk to your nearest hardware store get some cheap asphalt and pour it in a hole.
The governments are deluding themselves. Roads need to be completely repaved after years of borderline neglect. If you only repave a road when an oil tanker gets into an accident and basically melts the road or create new electrical lines when a storm knocks them down, then these problems will spiral out of control.
Infrastructure has broad reaching impact. A horrible infrastructure hurts the economy. A modern and maintained infrastructure allows for the efficient use of resources, facilitation of trade and business, and continuation of vital services like water and heat.
It is extremely difficult to find good US infrastructure companies that are worth investing in. I will start with a company that is down, but not out. Sterling Construction Company (NASDAQ: STRL) looks like it has hit some hard times based on its financials. I'm not a highly paid expert, but losing money is generally a bad thing. Flippancy aside, a civilian construction company losing money probably means it has very little work and might have gone over budget on some projects. Sterling specializes in transportation and water, which I know are sorely in need of upgrades in the United States.
There are a few projects for Sterling as you can see on the list of yahoo headlines, though there is nothing special. It also recently just appointed a new CEO. I like Sterling's low debt to equity ratio of 0.1075. When money finally starts flowing into infrastructure projects it can use debt to quickly gear up for the projects. It can grab more projects by using leverage to obtain equipment and personnel. If cost controls are in place this could be a way to recover all the ground it has lost over the last few years.
I suspect that infrastructure spending will increase starting in 2013, and assuming the economy is on the mend start picking up in 2014. The current smaller projects will be a good judge of whether Sterling can win profitable contracts. If you see bills pass through Congress focusing on infrastructure or the states' tax revenues increase, then look into Sterling and see if it is in a position to benefit. Then hop in.
If you do not like the builders then go for the raw material suppliers. Originally, I was going to put Vulcan Materials Company (NYSE: VMC) as my second choice. Instead, I find that the company is losing money, although it did just announce a token dividend. It appears to be a takeover target for Martin Marietta Materials. (NYSE: MLM), which is profitable. Vulcan is the larger producer of aggregates, and Martin Marietta is in second place. However, Martin Marietta is doing better financially, and sports a better dividend. An interesting effect of the takeover could be the inclusion of Martin Marietta to the S&P 500, though this might happen even without the takeover.
If you like playing mergers than you can try to go for Vulcan, though I would wait for word from Martin Marietta that the takeover is still a possibility. Acquiring companies very often suffer a drop in share price as skeptical investors believe that the promised synergies will take forever, or not come to pass at all. Also, companies pay a premium to acquire a target. The share price might dip if the merger is confirmed. However, if the takeover is canceled there might be a bump in the share price and you can wait till that bump goes away before taking a position.
With all the M&A news there is very little out there about the prospects of the company itself. Focusing on the big picture, as an aggregates producer increased construction activity will help it. Martin Marietta is the second largest producer of aggregates in the US after its takeover target. Martin Marietta will benefit from infrastructure spending, and from a rebound in the housing market. It sells into both. I expect housing and infrastructure to rise together, and having this dual exposure should workout well for the company. Considering it is currently profitable, and has an acceptable dividend I think Martin Marietta would be the best way to invest in a resurgence of infrastructure spending for those that do not want to risk a turnaround story in Sterling.
Conclusion
Turnaround stories and takeover plays are risky. If safety is your thing Martin Marietta is one of the ways to go. There are many more companies out there, but I like Sterling's specialty and having a new CEO means there is a chance that the company will turn itself around with new blood. Martin Marietta on the other hand seems like a solid company well positioned to benefit from both infrastructure spending and a rebound in housing construction. If I was going to stake out a position for US infrastructure spending Martin Marietta seems like the way to go.
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