Improving America’s infrastructure is one rare area of bipartisan agreement. According to Gallup, 75% of Americans agreed with the idea of spending more "federal money to improve infrastructure, including roads, buildings, and waterways."
Further, the American Society of Civil Engineers (ACE) gave America a D+ in terms of infrastructure which shows that improvements are desperately needed:
- According to the ACE, nearly 10% of bridges are structurally deficient.
- US airports are facing a $42 billion funding gap over the next decade to keep up with maintenance.
- There are over 90,000 dams in the US with an average age of 56. An estimated 2,100 are “highly hazardous” and require immediate improvements.
- The electrical grid is aging. As witnessed in Texas, there is the potential for outages in certain scenarios.
- 20% of highway roads are in poor conditions which led to an estimated $190 billion in wasted time and fuel.
- 24% of US schools need maintenance and upgrades
- 12% of wastewater facilities are also in “critical” need of upgrades
Politics breeds inertia. So, despite this combination of need and bipartisan support, efforts have fizzled out in past years. However, there are some reasons to believe that this time could be different.
For one, President Biden made infrastructure spending a centerpiece of his campaign. Second, Democrats have control of not only the White House, but have the majority in the Senate (50/50 split with the Democratic Vice President Kamala Harris being the tie-breaker), and House of Representatives, which increases the chances of success of Bidens infrastructure plans. Third, the pandemic has created an output gap which is going to be filled with additional deficit spending. Infrastructure is a likely choice given its broad public support.
Biden’s Infrastructure Plan
According to reports, President Biden is considering an infrastructure package worth between $2 trillion and $4 trillion that would include upgrading roads, bridges, tunnels, and highways. Significant investments in the country’s energy infrastructure to prepare for the phasing out of fossil fuels. Additionally, he wants to improve the digital infrastructure by expanding broadband access to rural areas.
Investing in infrastructure has the short-term benefit of increasing employment and economic activity. In the long-term, it increases the productive capacity of the country by facilitating commerce and lowering costs.
Although, specific details of the proposal haven’t been revealed, here are some items that will likely be included based on comments from public officials and during the campaign:
- Send federal funding to states and local governments to rebuild and upgrade highways, roads, and bridges. Increase funding for the Highway Trust Fund for interstate highways.
- Revitalize infrastructures like ports, inland waterways, and railways for passengers and freight. Expand high-speed railways and fund improvements in commuter rails systems.
- Retrofit federal buildings for increased energy efficiency and cost-savings.
- Reinvest in America’s water infrastructure to ensure access to clean and safe drinking water by repairing and replacing pipelines, sewers, and treatment plants.
- Invest in clean energy, carbon capture, use, and storage technology, smart grids, and stationary storage.
- Reduce the carbon footprint of buildings by 50% by 2035 through investing in electrification and energy efficiency technologies.
- Boosting the adoption of EVs by investing in and building 500,000 electric vehicle charging stations by 2030 and restoring tax credit incentives for purchasing electric vehicles.
Secondary and Tertiary Effects of Infrastructure Spending
Investors should also understand that infrastructure spending on this scale is likely to have secondary and tertiary effects, such as:
- Long-term interest rates will see an uptick on increased growth expectations.
- Industrial commodities like copper, iron ore and steel will see further gains.
- Emerging Markets will outperform due to increased exports.
- Wages will likely rise and contribute to inflationary pressures, possibly accelerating the Fed’s schedule for hikes.
- Higher costs due to commodity and wages rising could lead to eroding margins for some companies.
Therefore, investors should consider a wide array of stocks that will benefit from these trends. Many of these stocks have attractive valuations and are likely to outperform due to a combination of earnings growth and multiple expansion. Five top infrastructure stocks to consider buying are Rio Tinto (RIO), Cummins (CMI), ArcelorMittal (MT), Eaton (ETN), and Southern Copper (SCCO).
Rio Tinto (RIO)
Infrastructure spending means that demand for commodities will increase, specifically industrial metals like aluminum, zinc, copper, iron ore, and titanium dioxide. These metals are important inputs for any sort of construction project. Already, these metals have been quite strong over the past few months as investors anticipate strength in the industrial economy in part due to infrastructure spending.
When it comes to industrial commodities, RIO is one of the major producers with mines in six continents. The company’s primary product is iron ore which is the raw material used to make steel. Steel is also a necessary component of any infrastructure project. For investors, RIO is particularly attractive given its forward PE of 10 which means it has the potential for earnings growth and multiple expansion.
RIO is rated an A by the POWR Ratings which equates to a Strong Buy. The POWR Ratings are calculated by compiling 118 different factors, each with its weight. Over the last 30 years, A-rated stocks have a compound annual return of 30.7%, while the S&P 500 has returned 7.1% over the same time period.
The POWR Ratings also evaluate stocks by various components. In terms of momentum, RIO is rated an A. This isn’t surprising given that the stock made a new, all-time high in March. Additionally, it’s an outperformer across multiple timeframes with a 9% gain over the past month, 12% gain YTD, 20.4% gain this quarter, 35.6% gain over the last six months, and 75.1% gain over the past year.
Further, RIO has a grade of B for Value. RIO has a price to earnings (PE) ratio of 13, while the S&P 500’s PE is 39.1. RIO also pays an above-average dividend yield of 5.6% and also has $12.2 billion in cash which is particularly impressive given its market cap of $145 billion.
The POWR Ratings also evaluates RIO by other categories including Quality, Growth, Stability, Sentiment, and Industry. Click here to see the rest of RIO’s grades.
Cummins (CMI)
CMI is a leading manufacturer of engines used in heavy and light trucking. Its engines are renowned for their performance, quality, and reliability. However, shares have underperformed and fallen out of favor as diesel engines are slowly being phased out due to environmental concerns. However, in anticipating, CMI is aware of this and pivoting to cleaner means like natural gas and electric powertrains.
Yet, in the short-term, the boom in infrastructure spending is going to benefit CMI as spending for trucks will certainly increase. Additionally, many of its competitors have been leaving the business which is leading to more market share for CMI.
CMI has a forward PE of 16.4 which is about 35% below the S&P 500’s forward PE of 22. It also pays a dividend yield of 2% which is higher than the S&P 500’s dividend yield and the 10-year Treasury. Despite these strong value characteristics, it expects to grow earnings by 17% over the next 12 months.
The POWR Ratings are also bullish on the stock as it’s rated a B which equates to a Buy rating. This is consistent with its above-average growth and value factors. B-rated stocks have a compound annual performance of 17% which is significantly better than the S&P 500’s average annual return of 7%.
CMI is also rated an A for Quality. This fits with Cummins’ best-of-class engines which have created significant customer loyalty and pride. Its management team also has a long track record of growing earnings through various market climates. It faces a challenge in transitioning away from diesel engines. In 2021 and 2022, this won’t be a concern as diesel engines are dominant.
The POWR Ratings also evaluates CMI by Value, Growth, Sentiment, Momentum, Stability, and Industry Rank. To learn more, click here.
ArcelorMittal (MT)
Currently, we are seeing strength in many industrial commodities. Over the last decade, these commodities have generally underperformed so companies have not been investing to increase production. Thus, supply is tight in the near-term.
On the demand side, the industrial sector has been less affected by the coronavirus than many other sectors as total output is running just 5% below pre-coronavirus levels. Further, there’s optimism that demand will continue to improve given more infrastructure spending in addition to companies’ need to restock inventories.
One of the biggest beneficiaries of this state of affairs is MT which was formed in 2006 via the merger of Arcelor and Mittal Steel. MT accounts for 5% of the world’s steel supply and has a presence in more than 60 countries.
MT’s shares look quite attractive from a growth and value perspective. It has a forward PE of 7.5 which is ⅓ of the S&P 500. In anticipation, the company expects double-digit revenue and earnings growth in 2021.
The last decade was tough for the steel industry as it grappled with oversupply and weak demand. MT used this weakness to improve operations and gain market share. Now, it has the ingredients of a big winner as demand and supply conditions are much more favorable.
MT is rated an A by the POWR Ratings which equates to a Strong Buy. This is consistent with the company’s market share, operational excellence, and improving economic conditions. In terms of Growth, MT is rated a B. Wall Street analysts have been aggressively hiking MT’s earnings estimates in recent months as the company’s prospects continue to improve. 2021 estimates have increased from $1.30 in EPS to $4.31, while 2022 EPS estimates were hiked from $1.85 to $3.05.
The POWR Ratings also evaluates MT by Value, Momentum, Sentiment, Quality, Stability, and Industry Rank. To learn more, click here.
Eaton Corp. (ETN)
ETN was founded in 1916 and is based in Dublin, Ireland. The company manufactures and designs fluid power systems for industrial, mobile, and aircraft equipment and electrical systems and components for power quality, distribution, and control.
A major component of infrastructure spending involves strengthening the electrical grid. The electric grid in the US is decades-old and as the recent outages in Texas showed, they are in need of improvements especially for situations with extreme weather. Another factor is that as fossil fuels are phased out, electricity demand will increase.
Thus, ETN will be a major beneficiary of this type of investment. In 2020, ETN’s revenues slipped by 8% and 9% due to deferred spending amid the pandemic. However, it expects a surge in sales in 2021 on higher levels of economic growth as delayed projects are completed. Thus, ETN anticipates earnings growth of 88% in 2021.
The POWR Ratings are also bullish on ETN as it has a B rating which equates to a Buy. This is consistent with the improving macroeconomic environment for ETN. ETN also has an Industry Rank of an A as these positive catalysts are benefitting nearly every stock that produces industrial equipment and machinery.
The POWR Ratings also evaluates ETN by Value, Growth, Sentiment, Quality, Stability, and Momentum. To learn more, click here.
Southern Copper Corp. (SCCO)
SCCO has operations in Mexico, Peru, and Chile. It’s the fifth-largest copper producer in the world with 1.02 million pounds. Copper accounts for 80% of the company’s revenue. Its cost per pound of production was under $1 in 2019.
It might also have the most upside relative to other copper stocks because it has the largest copper reserves of any publicly-traded company. The company is also expected to have the highest increase in copper production as it’s aiming for an 80% increase over the next five years.
Aside from its substantial growth prospects, another thing that makes Southern Copper stand out as a top option for investors is its low-cost operations. In 2018, the company produced copper for a net $0.87 per pound after taking into account by-product credits, which is among the lowest in the sector. The company sees that number falling to $0.80 per pound in 2021 as it benefits from a project at its Toquepala mine in Peru.
SCCO is rated an A by the POWR Ratings which equates to a Strong Buy. This isn’t surprising given SCCO’s attractive valuation, low-cost production, and strength in copper prices. The stock also has an A for Momentum which fits SCCO’s outperformance over multiple timeframes compared to the broader market. The POWR Ratings also evaluates SCCO by Value, Growth, Sentiment, Quality, Stability, and Industry Rank. To learn more, click here.
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RIO shares were unchanged in after-hours trading Tuesday. Year-to-date, RIO has gained 13.95%, versus a 3.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.
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