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As readers of this site know, I am all about the infrastructure boom. Both for infrastructure growth to support the lighting speed growth in China, India, Mid East…and infrastructure repairs needed in the U.S. I am so convinced that this theme trumps all other investable themes out there that my portfolio is now concentrated on this theme, diversified only by the different components of the infrastructure buildout.
First, my conviction is based on the fact that infrastructure is the foundation of modern civilization. We must keep our utilities running so we can have water and power. Witness the chaos in New Orleans after Katrina. New Orleans, a limited area, and yet the importance of our daily infrastructure necessities could not be more obvious.
This leads to the second reason for conviction: governments must put infrastructure integrity as a top priority. Same for both the U.S., whose infrastructure needs massive repairs, and China, who is building cities daily. The fundamental need to have solid infrastructure means, to me, governments will finance these projects regardless of the economic conditions…baring a full scale global depression. Even in the depression, we completed big projects like the Hoover Dam, setting ourselves up for decades of power to fuel the growth on the west coast.
Thus, specific infrastructure plays should be relatively insensitive to the slowdown or recession if you look out 3-5 yrs. And although I don’t care much for the “long term” investment theories, for these companies you have to look out 3-5 yrs just because many of their projects take several years to complete. But yes, in the long term we’re all dead, so don’t just buy, hold, and forget!
POWER GRID
As just mentioned, the basic utilities are my #1 focus, and the power grid specifically.
“Demand for cable products in the developing regions of the world is being driven by high levels of energy infrastructure, construction and mining activities. Particular strength is coming from government sponsored infrastructure projects in Latin America and Southeast Asia. Additionally, the core infrastructure investment required for the upcoming 2010 World Cup soccer event in South Africa has added pressure to an already taxed energy grid that is also supporting growing mining activities in the region, resulting in increased spending for energy transmission and distribution as well as construction,” said Mathias Sandoval, President and Chief Executive Officer, General Cable Latin America, Sub-Saharan Africa and Mideast/Asia Pacific.” General Cable 2008 Q2 Earnings Release
I’ve written many times about the power grid, and the company ABB Ltd. (ABB) specifically as they’re one of the most exposed to this trend, but also because public companies with exposure to this theme has been hard to find. Woodward Governor, WGOV, this past quarter has shown to be a strong beneficiary in developing the wind power part of the power grid. I also like SPX Corp. (SPW) for its transformer business. Thomas & Betts Corp. (TNB) has a lot of the small electrical components and makes the huge towers for the transmission lines, but have yet to shown it is benefiting from the power grid repair and buildout. Possibly because a lot of it’s electrical components are also used in industrial and commercial buildings, which aren’t so hot anymore. Also, as more transmission lines are now buried underground rather than strung overhead by steel towers, TNB’s transmission tower growth might be limited. But other than that, it has been difficult to find suppliers of the “stuff” going into the power grid.
The most obvious “stuff” are the transmission lines we see everywhere. However, the biggest transmission line and cable producers, domestic and international, are divisions hidden within larger companies. For example, the biggest producer of copper cables is General Cable (BGC). However, it has so many other businesses and domestic infrastructure construction services that, to me, dilutes the value of the power grid cable business. Sort of like how GE’s finance division diluted the value of its strong global industrial and infrastructure business, but obviously not extreme. Note, though, that BGC bought Phelps Dodge’s copper cable business when Phelps Dodge merged with Freeport McMoran (FCX).
This growth was principally due to the acquisition of Phelps Dodge International Corporation (PDIC) in the fourth quarter of 2007, the Company’s exposure to global electrical infrastructure markets and favorable foreign exchange translation partially offset by lower demand as a result of ongoing weak economic conditions primarily in the United States and Spain which are major markets for the Company.
In this one move, copper cables is now the dominating business in BGC, and BGC’s sales will be mostly international- some 64% in the last quarter. The reserve I have of jumping into BGC is whether they have the ability to grow or has become a large supplier of a commodity for the power grid. I have limited slots for power-grid stocks, and BGC isn’t replacing my ABB, WGOV, or SPW yet.
Along the same lines,
South Korean cable maker LS Cable has received regulatory approval from the U.S., Spain and Germany to acquire copper wiring firm Superior Essex and create the third-largest global maker of magnet, communication, industrial and building wire with pro forma consolidated annual revenues of almost $13 billion. ~ LS Cable is Buying Superior Essex,
Thus, confirming the value of companies supplying power grid components, but many of which are private, international, or subsidiaries of bigger corporations.
BRIDGES
Like the Power Grid story, our road infrastructure repair and upgrade isn’t a question of IF, but WHEN. While companies like Terex (TEX) have taken a beating with the rest of the market, understand that a big wave of demand for road construction equipment is coming, and soon.
“A report from the American Association of State Highway and Transportation Officials estimates that $140 billion is needed today to repair all the nation’s bridges. An Associated Press report cites Federal Highway Administration statistics that 152,000 out of the nation’s 600,000 bridges are either structurally deficient or functionally obsolete.
Nearly 25% of the nation’s bridges need repairs, and the average age of America’s bridges is 43 years — seven years shy of the maximum age for which most are designed, according to the “Bridging the Gap” report. One in five U.S. bridges is more than 50 years old.”
The U.S. government is good at just focusing on short term problems or worthless issues, but as more roads crack and bridges collapse, there’ll be another panic to deal with another crisis, and companies like TEX may benefit more than if these road repairs were done right now. A construction/repair binge would likely cause shortages of equipment just as the mining binge now (from decades of neglect to invest) is causing shortages of Joy Global (JOYG) and Bucyrus (BUCY)’s underground mining equipment.
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This article has 17 comments:
Weird idea not being mentioned...but love to hear pros and cons....
My point is copper companies wouldn't be a great utility infrastructure play. There's been very little comparative growth in US transmission lines since the '70's and the system is strained. The wire & cable divisions of the big 3 aluminum companies used to supply most bare aluminum conductor as a cheap way to move metal in the US. That would be Alcoa, Kaiser & Reynolds, also Alcan. Even if they still existed, they wouldn't be the pure play you're looking for.
Electrical World magazine has been around since 1936
tdworld.com/
T&D mag has been around a while too.
article in todays SA: Emerging Market Infrastructure
seekingalpha.com/artic...
I think the most immediate benefits of the larger infrastructure supercycle that we are entering into is going to be riding the coattails of the current commodity supercycle. As the price of gold, PGMs, and nearly every other natural resource have been at or near record highs in past months, some of the best long-term plays - especially after July's atrocious performance in commodities - is to buy up the stocks related to expanding agricultural yields and mining/exploration. I've read in several sources that the US will need to spend anywhere from $1T to around $3T in the next decade simply to MAINTAIN the current infrastructure, and that much of the US infrastructure is not in acceptable conditions at all (remember the 35W bridge collapse last year in Minnesota???). Additionally, with massive economic growth in the BRICs/EM/Frontier Markets, infrastructure development is in dire need.
Jeffrey Lin, I agree 100% about GE essentially being an infrastructure ETF. They seem to be focusing in on it as their core business.
I'd also take a look at Macquarie Bank. They have been trounced as of late, but with their various infrastructure funds, knowledgeable personnel already on staff, I'd be shocked if they didn't expand their public/private model in more infrastructure-related sectors.
Cheers
And any mention of infrastructure is incomplete without mentioning drinking water. This is probably the number one issue in China and emerging markets, as it is more important than roads or electricity (try living without all three for a week).
I have been struggling with this theme, but there is no easy way to play it all. Lots of fragmentation and segmentation across the board. SI, GE, ABB are all big dogs, and they all have a good chunk of the water and power industries. Beyond that you have to get a bit more creative, but the big engineering firms are probably a good bet as well. JEC, FLR, FWLT, and SGR. Cemex too, since everyhting but transmisison lines needs LOTS of cement. For water, VE and FLS seem destined for greatness. The list goes on.
Just don't forget about water, it is the next oil for wars and investing.