Secure Energy for Prosperity

Buying Into the Global Infrastructure Build

Your article raises many of the right issues to consider given the so-called "global infrastructure" boom. Within each macro trend, there are many ways to go wrong, so breaking this down by sector is a good way to evaluate it.

For example, the "water" sector has received a lot of hype recently - to the extent that many ETFs have been developed to capitalize on it. Unfortunately, investors and ETF marketers have not been disciplined about what "water" actually means. Moreover, in the rush to jump on the bandwagon, we've seen a lot of press about the inevitability of a water spending boom - but little discussion of where the funds will come from in a time of reduced tax revenues and national/global recession.

I prefer to maintain the integrity of a macro-trend analysis by identifying companies that I don't believe will be able to capitalize on the trend. For example, in water infrastructure, many have argued that the utility companies will be able to raise water rates to pay for needed upgrades. Let's think about that. These companies are certainly monopolies - but when we see the wrath that even cable television operators get for raising rates, why do we think water utilities will be able to do so successfully? I would argue you can't go wrong betting that people will put off repairs until tomorrow that should be done today, especially in a recession.

Conversely, Insituform (INSU) provides an almost-literal "band aid" solution for broken water infrastructure, with a technology that allows them to repair water mains & pipes internally, without costly digging. There is some hair on this stock for other non-fundamental reasons (governance, hedge fund involvement, etc) but I believe the primary thesis plays well during a recession.

Cable television and fiber optic / broadband internet is also an infrastructure play, but this sector highlights a similar issue as water utilities: Be careful when the companies that may benefit from end-user demand are also the ones that must spend massive amounts of capital. More than likely, there is another supplier one step removed from the utility (or cable company) that stands to benefit from that infrastructure spending being passed through - from higher cable bills to the cable operator to the equipment provider. Cisco (CSCO) would be one example. Moreover, its the company dealing directly with the consumer that takes the *political* heat for the rate increase! Avoid rock-and-hard-place situations.

Your recommendation of the tower companies (AMT, CCI) plays nicely to this thesis, given that it is the wireless companies (Verizon, AT&T) who have to spend money on the infrastructure.

Within cable, I would point out that Mediacom Communications (MCCC) operates in areas where the large phone companies are *not* building out competitive fiber networks. So unlike Comcast and Time Warner Cable, who will face intense competition, Mediacom (MCCC) is actually improving its market position (particularly with competitive DSL offerings raising their prices in light of recent FCC decisions).

Within energy infrastructure, there are many issues to address. One I would highlight is solar power. We periodically read about the idea of a "Manhattan Project" to promote various clean energy technologies. Although I don't agree that the Manhattan Project is the right analogy to use, the idea that a certain Big Bang catalyst is necessary is gaining credibility.

One gold ring for solar companies would be a concerted government effort to develop large-scale solar projects in the Southwest. These projects are beginning on a small scale. And clearly, with every advance in solar cell efficiency and cost reduction, the price tag for a multi-gigawatt "Marshall Plan" (I prefer this analogy) is improved.

Solar continues to benefit from rapid but incremental growth. If a Federal government program to develop truly utility-scale solar is launched, the PV manufacturers are positioned for a home run. Silicon makers may benefit, but may be left out if a thin-film or non-silicon technology is capable of yielding the efficiency necessary to make large-scale buildout economic. Longer term, however, the entire industry would benefit as manufacturing plants would expand and economies of scale would lower costs across the board.

There are many risks to juggle here: technology improvement, Federal energy policy, local & state land restrictions, and oil prices, to name a few.

From water to television to solar, a macro infrastructure boom will still result in losers as well as winners.