Congress and the White House recently approved a new wave of stimulus measures. With the recent cash injection and President Joe Biden’s stated focus on infrastructure as an agenda item, investors are wondering if an infrastructure stimulus may be up next. Based off the price of numerous infrastructure stocks, it’s clear investors certainly think so.
Investors love the idea of an infrastructure bill. It acts as a de facto stimulus bill, but it doesn’t just inject money directly in the banking system, businesses via loans and to consumers via direct payment. Think about it. The government inks a bill with several hundred billion dollars to go around. The next thing you know, states, contractors and companies are locked into multi-month and multi-year projects with one job after the next lined up.
Engineers, machine operators, laborers, environmental workers and more line up and get paid as the work streams in. Companies pull in cash hand over fist. It acts as an economic stimulus for workers and companies. That’s why Wall Street is so hopeful that one day, we get an infrastructure bill out of Washington.
The question is whether it’ll be from this administration or not. If it doesn’t happen, infrastructure stocks will see an obvious blow. However, even without a stimulus bill, infrastructure stocks have improved based on the prospects of a reopening economy. Investors are bidding on normalcy, buying stocks that will likely see a surge of business once the world opens for business once again–hopefully for good.
Let’s look at a handful of infrastructure stocks that have had plenty of momentum lately:
- Caterpillar (NYSE:CAT)
- Vulcan Materials (NYSE:VMC)
- Cummins (NYSE:CMI)
- United Rentals (NYSE:URI)
- Deere (NYSE:DE)
- U.S. Steel (NYSE:X)
- iShares U.S. Infrastructure ETF ((BA)TS:IFRA)
Infrastructure Stocks to Watch: Caterpillar (CAT)
How can we talk about infrastructure stocks and not start with Caterpillar?
The leading heavy equipment manufacturer of the world is virtually synonymous with these types of projects. If someone has a big construction project on the books, they already know they’re booking some time with Caterpillar.
The only “problem” with Caterpillar (if we can call it that) is shares continue to hover near the highs. The stock has been marching higher for several quarters now, as it’s also part of the reopening trade.
When the novel coronavirus swept through the world, it put all sorts of projects and developments on hold. With those projects (and more) coming back to life, Caterpillar and other infrastructure stocks have been on fire.
The company’s rolling three-month sales period is showing improving signs, signaling that the world may really be making a push back toward reopening. While the U.S. is making rapid progress with the vaccine, many other parts of the world haven’t been quite so lucky.
As they gain traction though, look for Caterpillar to continue seeing an improvement in its sales.
Vulcan Materials (VMC)
Vulcan Materials is not an especially well-known company, although with a market capitalization of $23 billion, it’s not exactly flying under the radar. Investors just tend to focus on the headline names.
For infrastructure stocks, people only pay attention to big names like the above Caterpillar. As for the stock market at large, Apple (NASDAQ:AAPL) is always up front and, for some reason, Tesla (NASDAQ:(TSLA)) CEO Elon Musk is always making headlines.
With a company like Vulcan, not too many investors get excited about aggregates — but they should. The company is a provider of crushed stone, sand and gravel used to make asphalt and concrete. In fact, it is the largest producer of aggregate in the country.
So if there’s going to be a large infrastructure bill, investors better believe that Vulcan will be on the receiving end of some of those phone calls. The company itself says:
“What we mine and sell—aggregates—are indispensable to infrastructure and growth; We take care of the land through the entire cycle of productive use from mining to restoration and re-use. We serve our customers and communities well. Always with the long view in mind. This is how we sustain success.”
Cummins is another infrastructure name to keep in mind. Unlike Vulcan or Caterpillar, though, it’s not completely tied to buildings and projects.
When you head to the Cummins site, you’ll find this engine maker can be found in a lot more than some Dodge Ram trucks or a few semi trucks. It’s in various industries ranging from agriculture to construction, defense, drilling, bussing, fire and emergency vehicles, marine, mining and more. The company also has a components business, as well as a generators and power systems unit.
Think those have a place in infrastructure projects? You bet.
Could Cummins also see a bit of the EV and alternative fuel momentum? They seem to think so, saying “As leaders in battery, fuel cell, and hydrogen-production technologies, we’re steering the way to a brighter tomorrow. Today.”
It’s possible. Regardless though, the company will be an immediate beneficiary of increasing infrastructure spending in 2021 and beyond.
United Rentals (URI)
I really like United Rentals. They bring such a unique view to this group of stocks. When new projects begin, companies need equipment. Sometimes they only need certain tools or machines for a specific task. Other times, they need to quickly increase their tool count for a flurry of activity (think of an overhead bridge or highway work that needs to be completed in a hurry).
United Rentals is there to help. It doesn’t matter if it’s a highway infrastructure project or a new commercial building going up downtown. In hundreds of scenarios between these situations, companies need a company to count on.
United Rentals has two main businesses: general rentals and trench, and power and fluid solutions.
The first group is pretty simple, consisting of tools, components and machines that workers need to get a job done. The second group is a bit more specialized and includes everything from trench shields to construction lasers, HVAC and generators.
Put simply, no significant project gets going without United Rentals playing some kind of role.
Perhaps the hottest industrial stock has been Deere. The company continues to knock the ball out of the park and the stock continues to surge as a result.
Deere was flirting with a breakout in February 2020, just as the coronavirus selloff was beginning. Ultimately, shares sank about 41%. But that holds up great compared to other stocks, it did pretty good vs. the S&P 500 — which fell about 35% — and did okay considering the situation.
Forget about the decline, though. At its recent high, shares are up over 230% from the March 2020 low. What an explosion of performance. The momentum isn’t just isolated to the stock performance either, as business has been booming as well.
Despite heightened expectations, Deere grew equipment net sales 23% to $8.05 billion in the first quarter, more than $900 million ahead of expectations. Earnings of $3.87 a share topped expectations by $1.70 per share, which was almost 80% higher than consensus estimates. On top of that, management provided an upbeat outlook for the year.
Simply put, Deere is firing on all cylinders. However, this name is typically associated with agriculture, not infrastructure. That is where the company got its start and continues to thrive, as well as in lawn and grass care.
That said, it also has a solid construction business, specializing in both compact and heavy machinery. Dump trucks, backhoes, excavators, skid steers and more. Deere has a place in this space and with the increase in construction, this company should see an increase in business.
U.S. Steel (X)
It’s hard to talk about infrastructure stocks and not touch on steel. Steel plays a big role in all sorts of projects, ranging from buildings to parking centers, bridges and more. In that sense, U.S. Steel should be on investors’ radar too.
Shares continue to hover near multi-year highs, as investors continue to anticipate pent up demand driving more business. Specifically, current estimates call for more than 50% revenue growth to $15.1 billion this year and for earnings of $3.63 a share.
At $25 per share, that leaves the stock trading at a paltry six times earnings. However, the problem is that estimates also call for earnings of just 55 cents a share in 2022. So while U.S. Steel seems cheap based on this year’s expectations, it may be expensive based on next year.
The key here will be momentum. Specifically, can the company garner more business this year than expected and can it maintain at least a bulk of that momentum going into 2022?
If the answer is yes, this stock likely has more potential to the upside.
iShares U.S. Infrastructure ETF (IFRA)
Last but certainly not least is the iShares U.S. Infrastructure exchange-traded fund. An ETF can be a great way for investors to gain exposure to a certain trend, industry or area of the market.
In the case of infrastructure, there are options too. The IFRA ETF gives investors a broad stroke of mostly equal-weighted holdings that should benefit from an increase in infrastructure spending.
2021 and the following years should help drive these stocks higher. If there’s an infrastructure bill out of Washington, this ETF will almost surely do well. It currently pays out a 2% dividend yield and that’s despite a hefty rally.
The IFRA ETF has rallied in five of the past six months and in ten of the past 12. At its recent high, the ETF was up about 45% from its September low.
Kansas City Southern (NYSE:KSU) and Hawaiian Electric Industries (NYSE:HE) are tied for the top holdings, at only 0.87% each though. Holding weight is distributed about equally through the rest of the top holdings, with two companies locked in a similar tie for second place at 0.83%.
On the date of publication, Bret Kenwell held a long position in DE.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.