11 Infrastructure Stocks To Watch

by: Alex B. Gray

Will Obama save your infrastructure stocks? The answer is, probably not. However, President Obama laid out his plan last week and a large part of the spending targets infrastructure improvements. Some highlights of the President's infrastructure spending included $30 billion for modernizing public schools, $27 billion for the highway system, $9 billion for rail systems and $15 billion for the rehabilitation of homes, businesses and communities. The plan also called for a $10 billion government-owned, but independent National Infrastructure Bank that would lend funds for major transportation, water, and energy infrastructure projects.

This level of government spending, whether you believe in it or not, will create investment opportunities among stocks that will participate in such projects. Therefore, now is the time to start putting together the watch list and begin due diligence. The battle in Congress that will take place over this new plan will give you time to be patient and do your research. It is also possible that many parts of the plan, including the infrastructure spending, may never get passed so it will be important as an investor to stay informed on the progress of any bill that may include new infrastructure spending.

One company that should be a beneficiary of increased government spending on infrastructure is MDU Resources Group, Inc. (NYSE:MDU). In addition to exposure to a potential recovery in infrastructure, an investment in MDU gives you stability from its utility operations and good long-term growth from its oil and gas exploration and production business. Additional details about the operations of MDU can be found in an article I previously published in April of this year.

Operating revenues for the second quarter of 2011 increased a modest 2.7% to $930.8 million while earnings slipped 8% to $44.9 million or $0.24 per share. The dip was in part a result of a 9% decline in natural gas prices and lower storage related activity from the company's pipeline and energy services division due to narrow seasonal basis differentials. The company's stock has traded in a relatively tight range over the last year and is currently offering investors a dividend in excess of 3%. If oil prices remain strong and the company can get a little help from increased natural gas prices, additional infrastructure spending should have this company running on all cylinders.

Sterling Construction Company, Inc. (NASDAQ:STRL)
is engaged in heavy civil construction with a focus on transportation and water infrastructure. The company is based in Houston, Texas and has operations in Texas, Nevada, Utah, Arizona and California. The company's transportation projects include the construction and repair of bridges, light rail, highways, toll roads and city streets. The water infrastructure projects included the construction and repair of sanitary sewers, large diameter water systems, storm sewers and flood control.

STRL reported that second quarter revenues increased 10% to $128.5 million, but saw net income slip 10% to $4.2 million or $0.25 per share. Revenues for the first half of 2011 increased 12.2% to $227.7 million while net income slipped over 31% to 4.3 million or $0.26 per share. The company attributed the most of the erosion in net income to highly competitive bidding pressures in the marketplace. The company's balance sheet remains strong with working capital of $106 million which included over $70 million in cash and short-term investments. Sterling has minimal long-term debt and an unused $75 million credit facility at its disposal. The Company's backlog increased nearly 30% year-over-year thanks to successful bids for highway work in Texas. STRL should directly benefit from increased infrastructure spending by the government.

Granite Construction, Inc. (NYSE:GVA)
is a diversified civil construction services and materials company based in Watsonville, California. The company's primary construction activities are in California, the Pacific Northwest, as well as large heavy civil projects in the central and eastern portions of the United States. The company's revenues are primarily driven by projects relating to highways and other road development, rapid transit, tunnels, bridges and airports. The company also has a large construction materials division which supplied over 10% of revenues through the first half of 2011.

Revenues at GVA for the second quarter of 2011 increased 7% to $484.7 million and turning around a year ago loss to show a net profit of $4.9 million or $0.13 per share thanks in part to a 24% reduction in SG&A expenses. The company booked $526.7 million of new awards in the second quarter pushing the backlog up 31% to $2.1 billion over a year ago. The company maintains a reasonable balance sheet with $317.9 million in cash, cash equivalents and marketable securities and $262.3 million in total long-term and non-recourse debt. The company is also active in real estate development ventures and carries $78.7 million in real estate held for development and sale on its balance sheet. Granite pays a dividend and is currently yielding a healthy 2.6%.

Vulcan Materials Company (NYSE:VMC) is the largest producer of aggregates in the Untied States and is based in Birmingham, Alabama. Vulcan boasts having 172 stone quarries, 43 sand and gravel plants, 81 sales yards, 37 asphalt plants, and 118 ready-mixed concrete facilities. VMC has approximately 14.7 billion tons of aggregate reserves and shipped 147.6 million tons in 2010. The company's facilities serve 21 states, the District of Columbia and local markets surrounding operations in the Bahamas and Mexico. The company believes its operations are strategically located in states with the highest growth prospects such as California, Texas and Florida.

Total revenues at VMC dropped by roughly 5% to $702 million in the second quarter of 2011, but the company did see improvement in the bottom line cutting its loss from continuing operations by nearly 70% to $7 million or ($0.06) per share. However, excluding a debt retirement charge this year and a charge related to a legal settlement last year earnings from continuing operations would have been $9 million or $0.07 per share compared to $5 million or $0.03 per share. According to VMC management, the company expects to see year-over-year aggregates volume increase 2 to 6 percent in the second half of 2011. In addition, management anticipates pricing to be 1 to 3 percent higher for aggregates. The stock currently yields 3% for those willing to wait for an infrastructure recovery.

Coming in a close second in the aggregates market is Martin Marietta Materials, Inc. (NYSE:MLM). MLM owns 285 quarries, distribution facilities and plants in 28 states, the Bahamas and Nova Scotia. MLM is also a provider of asphalt, ready mixed concrete, lime and magnesia chemicals. MLM has approximately 13.6 billion tons of aggregate reserves and shipped 130 million tons in 2010.

Second quarter sales at MLM slipped 4% to $426.7 million while earnings dropped 34% to $35.8 million or $0.78 per diluted share. Like Vulcan, MLM continues to be impacted by the slow pace of residential construction activity and uncertainty in the funding of major infrastructure projects by the states and the federal government. MLM is currently rewarding its shareholders with a dividend yield of 2.3%.

If it is limestone in which you seek exposure, take a look a United States Lime & Minerals, Inc. (NASDAQ:USLM). USLM is a small capitalization company based in Dallas, Texas primarily focused on the manufacture of lime and limestone products. Its products supply the construction, steel, municipal sanitation, water treatment and oil & gas industries. In addition, it products are also used by the aluminum, paper, glass, roof shingle, agriculture and utility industries. The lime and limestone operations of USLM are primarily located in the south central portion of the Untied States including Texas, Arkansas, Colorado, Louisiana and Oklahoma. In addition to its lime and limestone operations, USLM also derives revenue from royalty interest in oil and gas wells on 3800 acres of its property located in Johnson County, Texas.

In the second quarter of 2011, USLM revenues slipped a modest 2.9% to $36.8 million. While the lime and limestone operations struggled with a 7.7% drop in sales, overall revenue was supported by a 94.8% increase in revenue from the Company's natural gas interests. Net income was nearly flat for the second quarter coming in at $5.8 million or $0.90 per diluted share compared to $5.7 million or $0.88 per diluted share in the second quarter of 2010. The increase in natural gas revenue was driven by the completion of seven new wells and the receipt of $487 thousand from the resolution of certain royalty ownership issues. The Company maintains a strong balance sheet with $46.3 million in cash and cash equivalents and only $58.5 million in total liabilities. Unfortunately for those investors seeking income from their equities, USLM does not currently pay a dividend.

Part of the Obama plan calls for the rehabilitation of residential and commercial properties. One quick and inexpensive way to improve any dilapidated property is to slap on a new coat of paint. With nearly 3400 paint stores primarily located in the United States, The Sherwin-Williams Company (NYSE:SHW) is certainly poised to benefit from any additional spending for rehabilitation projects. In addition to its paint products SHW also has other well positioned brands such as MINWAX®, KRYLON®, Purdy® and Thompson's®.

Net sales for the second quarter of 2011 increased 9.9% to $2.36 billion at SHW. The company attributed the sales gains to increased selling prices, acquisitions and strong organic growth in is Global Finishes Group. Net income for the second quarter was virtually unchanged coming in at $179.1 million or $1.66 per diluted shared compared to $181.7 million or $1.64 per diluted share in the second quarter of 2010. SHW has a strong history of paying dividends and currently yields 2%.

A lesser known company that may benefit from funding for rehabilitation is American Woodmark Corporation (NASDAQ:AMWD). AMWD is the third largest manufacturer and distributor of kitchen and bath cabinets in the United States and is based in Winchester, Virginia. The Company's brands include American Woodmark™, Shenandoah Cabinetry®, Timberlake®, and Waypoint™.

The company recently reported its fiscal first quarter ended, July 31, 2011 results in which net sales increased 20% to $131.2 million. Despite improved sales, AMWD reported a net loss of $2.7 million or $0.19 per diluted share compared with a net loss of $3.4 million or $0.24 per diluted share in the first quarter of 2010. Even though the Company maintains a relatively strong balance sheet with $71 million in cash and debt of $25 million or 14% of total capital, the Board of Directors recently suspended the dividend. Given the current state of the residential construction market, this appears to be a conservative and prudent decision.

Other companies that should benefit from increased rehabilitation work include home improvement retailers such as Lowe's Companies, Inc. (NYSE:LOW) and The Home Depot, Inc. (NYSE:HD). Both American Woodmark and Sherwin-Williams sell products through these major home improvement retailers.

If you want to jump on the Obama "green" bandwagon take a look at Axion International (AXIH.OB) for its line of environmentally friendly infrastructure products. The company's products are made from 100% recycled material and included railroad ties, i-beams, pilings and boards. The technology Axion used to produce it products was developed by scientists as Rutgers University and is being licensed by the company.

For the second quarter of 2011, Axion reported revenue increased 191% to $1.3 million however the net loss for the period increased to $3.2 million or ($0.13) per share compared to a net loss of $2.2 million or ($0.10) per share. The company increased it cash position in 2011 through the issuance of 10% Convertible Preferred Stock. The company has issued nearly 760 thousand preferred shares at a price of $10 per share. Each share of preferred is convertible into 8 shares at a rate of $1.25 per share. Axion is still in the development stage and has a market capitalization of less than $30 million and should be looked at as a very speculative investment.

Disclosure: I am long MDU.

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