By David Sterman
The massive government stimulus measures passed by the U.S. Congress in 2009 and 2010 enabled states to continue their work on major municipal projects. New highway spurs were completed, roadbeds were repaved and creaking bridges were shored-up. This not only provided work for individuals at a time when unemployment figures were inching up almost by the day, but it made a dent in improving an infrastructure rated "D" by the American Society of Civil Engineers.
And then the money ran out.
You can still spot various projects nearing completion, but any new projects are now on hold. This has wrought havoc for the firms providing these civil engineering services. They're laying off staff and idling equipment, prepping for a slowdown while the remaining projects in their backlog get worked off.
But help is on the way. Although there are far-ranging debates about the size and scope of government spending, both parties agree our nation's infrastructure cannot afford to markedly deteriorate. A rising number of bridges are badly in need of repair, and major roads are in need of fresh asphalt, and it's got everyone's attention. This is why President Obama included a large amount of infrastructure spending in his latest $447 billion jobs bill, or stimulus package.
Though other parts of his plan face an uncertain outlook, the roads-and-bridges part of his proposal is getting serious attention and should soon provide relief to the beleaguered construction industry. Here are five stocks that should rebound nicely once the funds start to flow again.
1. Sterling Construction (Nasdaq: STRL)
Sterling does it all: it builds and reconstructs road beds, bridges, railroad tracks and water transport systems. The company received a badly needed boost in 2010 when it snagged a piece of a $207 million road-building program outside of Austin, Texas. This is helping sales growth stay positive in 2011, and 2012, and helping keep the backlog above $700 million.
But since the spring season, shares have been sliding on concerns business will slow sharply after the backlog is gone and Washington dithers in its decision-making progress. The stock routinely traded in the $20s in the middle of the last decade and is now trading under $12. Yet the long-term view should be in focus here. Sterling has steadily expanded during the past decade across the U.S. Southwest. This expansion has helped the company to expand sales at an average of 15% annual pace in the past 10 years.
When infrastructure spending returns to historical levels (which it must if the nation is not to lose its economic efficiency), then Sterling's broadened footprint should help fuel new growth. Back out the company's $70 million in net cash, and Sterling sports an enterprise value of just $125 million, a mere fraction of its $600 million revenue base. Look for this stock to possibly rebound 50% back to the 52-week high when the outlook for infrastructure spending finally brightens.
2. Granite Construction (NYSE: GVA)
This company is like Sterling Construction, but with a twist. It also makes sand, gravel, concrete and other road-building materials -- for its own use as well as industry peers. This diversifies the sales mix and also lowers its own material costs. Yet also like Sterling, Granite Construction has fallen out of favor on fears of a coming stoppage in infrastructure efforts.
D.A. Davidson's analysts think Granite's "shares are substantially undervalued relative to the growth prospects over the next several years," and expect shares to trade from a current $20 to $30 in 12 months and up to $60 in the next five years. The catalyst for this stock is improved visibility into the outlook for infrastructure spending in coming years. Once this clarifies, the stock should start to move up off its current lows.
3. Vulcan Materials (NYSE: VMC) and
4. Martin Marietta Materials (NYSE: MLM)
These two stocks are quite similar, producing "aggregates," or the raw materials that go into roads. Each stock has fallen well of its 52-week high in recent months. Martin Marietta Materials remains profitable, even in a tough economy and is likely the safer choice of the two. This means if Vulcan is able to restore its profit margins back to industry norms (gross margins have fallen from 29% in 2007 to a recent 12%), then its shares could rebound even more aggressively, relative to Martin Marietta Materials.
5. Jacobs Engineering (NYSE: JEC)
Investors may not want to depend solely on Washington's lead to re-stimulate infrastructure spending. To offset the risk of Washington simply failing to agree on any package, you can focus instead on this major contracting firm, which has considerable exposure to roads and bridges, but also serves the oil and gas industry. Jacobs has also sought to reduce its dependence on the United States, deriving an increasing amount of business from clients in Europe and Asia.
Even in terms of infrastructure, Jacobs is a bit differentiated from the companies mentioned above. Roughly half the company's revenue comes from project services such as engineering, design, planning and procurement.
Jacobs actually felt the global downturn earlier than others, due to its strong exposure to Europe (sales fell roughly 15% in fiscal [September] 2010 to around $9.9 billion). But recent contract wins have boosted backlog and sales are again moving higher. Sales in the quarter ended July rose 9% from a year ago, stemming an eight-quarter losing streak. Per share profits of $0.71 were about 25% above year-ago levels. Don't look for a sudden slowdown either. Backlog now stands at $14 billion (equating to more than four years' worth of revenue). Any boost in infrastructure spending would only add to this pile. Shares, trading at less than 12 times projected fiscal 2012 profits, are a fairly modest value in relation to the turnaround under way on the income statement.
Risks to consider: Counting on Washington to agree on anything has been a losing proposition thus far this year. Yet a boost to infrastructure spending is looking increasingly likely.
These are highly cyclical stocks, moving up or down in anticipation of business trends to come. They've all sold off sharply this summer as the infrastructure spending outlook has weakened. As the outlook hits bottom and visibility increases on an eventual spending rebound, these stocks should rebound in tandem. Any one of these stocks would be a good pickup to play this trend, depending on your goals and risk tolerance.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.