Three infrastructure stocks to buy benefit from building roads and runways, among other colossal construction creations.
The three infrastructure stocks to buy amid a government spending spree on roads, runways and other public works projects are not just affected by federal funding but local and state budgets, too. Local and state financial support can be just as critical as the outlook for federal infrastructure stimulus, according to BoA Global Research.
If state budgets are not healthy and visibility on federal funding is limited, infrastructure spending slows. However, many state budgets began improving prior to the latest federal funding initiatives.
Three Infrastructure Stocks to Buy Gain Lift from Federal, State and Local Funding
Examples include passage of the federal stimulus bill in December 2020 that provided $10 billion to the Department of Transportation and the 2021 American Rescue Plan Act that included $350 billion for state and local governments. Another boost comes from rising tax collections due to an increase in the number of miles driven, enhancing support for Department of Transportation budgets, BoA wrote in a recent research note.
“The federal legislation moving through Congress helps infrastructure companies and stocks,” said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “But I’ve favored infrastructure stocks the last few years, even before the legislation. There’s a strong need for many different types of infrastructure both in the U.S. and globally. The stocks were doing well before the legislation started to move, and they’ll do well even if the bill fails or is scaled back.”
However, Carlson cautioned that he would avoid “closed-end funds.” Normally, these funds are a good way to invest in infrastructure because of their leverage and high yields but increased popularity of such investments in the last few years has caused quality infrastructure-oriented closed-end funds to sell at premiums to their net asset value, continued Carlson, who also heads the Retirement Watch investment newsletter.
Pension fund and Retirement Watch chief Bob Carlson answers questions from columnist Paul Dykewicz.
Carlson told me that he previously recommended Cohen & Steers Infrastructure (UTF) but the fund became so popular that it went from selling at almost a 10% discount to net asset value to trading at a premium. Most recently, UTF sold at a 7% premium to net asset value, he added.
Three Infrastructure Stocks to Buy in Search of Bigger Gains Than Funds Tend to Provide
“To get broad-based exposure to stocks in the infrastructure space, there is perhaps no better way than the Global X U.S. Infrastructure Development ETF (PAVE),” said Jim Woods, editor of Successful Investing, Intelligence Report and Bullseye Stock Trader. In late June, Woods recommended PAVE to subscribers in both the Successful Investing and Intelligence Report portfolios as a tactical play to take advantage of what he called, “A major wave of infrastructure spending that will have a positive revenue impact on the biggest and best stocks in the space.”
Paul Dykewicz meets with seasoned stock picker Jim Woods.
Even before any new federal infrastructure stimulus flows to the states, the outlook for infrastructure company Construction Partners Inc. (NYSE:ROAD), of Dothan, Alabama, is brightening in the southeastern part of the United States where Department of Transportation (DoT) budgets are expected to increase about 20% during the next 12 months. A key reason is positive demographic shifts through growth in population, housing and miles driven during the ongoing economic recovery, BoA opined.
ROAD Ranks as One of the Three Infrastructure Stocks to Buy
Federal infrastructure spending should only support increased project activity in ROAD’s regions, spurring heightened expectations for 2022 and 2023 budgets that caused BoA to affirm its “Buy” recommendation for Construction Partners.
BoA placed a $37.00 price objective on the shares of Construction Partners, based on 14.5x 2022 estimated enterprise value (EV) and earnings before interest, taxes, depreciation and amortization (EBITDA) amid an improving multi-year growth outlook.
Construction Partners went public in May 2018, so it lacks “historical valuation context” and has no “true” comparable company for analysis to assess due to its uniqueness as an infrastructure company that focuses on construction and maintenance of roadways across five southeastern states, BoA wrote. Publicly funded projects compose most of the stock’s business, including local and state roadways, interstate highways, airport runways and bridges. The company also serves the private sector market by offering paving and sitework services for office and industrial parks, shopping centers and local businesses, and residential subdivisions.
Thus, BoA assessed a range of companies from Aggregates to Civil Contractors, to Infrastructure Services firms to Waste Services that share similar business models or end market exposure. BoA opted to use a blended average multiple — below aggregates (18x EBITDA), above civil contractors (8-10x EBITDA) and more aligned with engineering and construction (E&C) companies that have transformed into Infrastructure Services firms (14-15x EBITDA).
Hazards Affect ROAD as One of the Three Infrastructure Stocks to Buy
Risks exist to ROAD achieving BoA’s price objective. They include uncertainty around FAST Act authorization, which expires in September 2021; weaker-than-expected infrastructure spending, with 30% of revenue tied to cyclical private construction; vertical integration risks, since operating a liquid asphalt terminal and a wide network of hot mixed asphalt plants can bring a different level of complexity.
Third-quarter earnings per share for Construction Partners of $0.18 came in below consensus analysts’ estimates of $0.33, the company reported in early August. Revenue of $261.7 million in the third quarter also slipped below analysts’ consensus forecasts of $291.5 million.
The company’s management pointed to strong customer demand, project funding and bidding activity but noted that like many other construction and infrastructure businesses, project delays occurred due to supply chain and labor constraints affecting ROAD’s operations, as well as those of its subcontractors and vendors. Even though ROAD has a stable and experienced workforce in its markets and strong purchasing power, it is not immune to these current industry constraints.
The company’s management said the supply chain disruptions were likely to subside in the coming quarters through fiscal year 2022. In that light, the company’s long-term growth strategy remains intact.
Chart courtesy of www.StockCharts.com
AECOM Wins Spot Among Three Infrastructure Stocks to Buy
AECOM (NYSE:ACM), a Los Angeles–based multinational infrastructure consulting firm, focuses on planning, design and engineering of construction management projects for transportation, buildings, water, energy and the environment. The company’s mission is to create a better world through its technical expertise and innovation, with its commitment to environmental, social and governance (ESG) priorities.
A Fortune 500 company, AECOM’s Professional Services business amassed revenue of $13.2 billion in fiscal year 2020. Even though AECOM cited a flat third quarter with its state and local customers, the federal infrastructure package is bullish for the stock.
Projects that had been deferred or delayed due to funding uncertainty now can gain approval. An industry indicator is that 50% of Department of Transportation budgets are federally funded, so passage of infrastructure legislation in Congress is important to greenlight projects.
Federal Funding Should Help Three Infrastructure Stocks to Buy Build Roads and Bridges
Federal funding from the surface transportation programs is expected to be used for projects such as roads and bridges, not administrative costs and maintenance, BoA wrote. States now should have more visibility about the availability of capital for multi-year projects. Additionally, states no longer must wait for Congress to extend funding for federal transportation programs every year, since the latest legislation includes a five-year reauthorization.
BoA’s $78 price objective on AECOM is based on 13.0x the investment firm’s estimated 2022 EBITDA for the company. This valuation multiple aligns with professional services/design peers, given AECOM’s improving balance sheet and likelihood of becoming net debt free in 18 months, BoA wrote. The investment firm described AECOM’s outlook as “recovering,” amid potential for infrastructure, transportation and environmental spending initiatives.
Risks to AECOM attaining the price objective set by BoA include weaker-than-expected global construction growth, particularly for public spending in the United States and a headwind from COVID-19. Potential catalysts that could help AECOM top the BoA price objective are stronger-than-expected infrastructure spending by local, state and federal agencies; higher-than-forecast cost savings from the company’s restructuring program; and better-than-expected free cash flow generation.
Chart courtesy of www.StockCharts.com
Good news came on July 27, when AECOM announced the U.S. Army Corps of Engineers (USACE) Baltimore District chose the company to continue providing nationwide environmental remediation services through the Multiple Award Military Munitions Service (MAMMS) III contract. The multiple-award contract, with a shared program ceiling of $240 million, includes five base years and up to two additional option years. Under the new contract, AECOM and its specialty subcontractors will keep providing a range of environmental services, including investigations, field activities, engineering, remedial actions and design, and support for environmental-related regulatory programs.
Unlike ROAD, AECOM topped consensus industry analysts’ forecasts with third-quarter revenue reaching $2.62 billion rather than $2.48 billion in the Americas and $789.3 million in the international business, compared to the consensus estimate of $716.2 million. Operating income for the Americas business totaled $168.1 million versus analysts’ consensus of $164.7 million, while it reached $46.4 million instead of a consensus of $44.3 million for the company’s international business.
Jacobs Earns Final Spot Among Three Infrastructure Stocks to Buy
Another infrastructure stock to buy is Dallas, Texas-based Jacobs (NYSE:J), an international technical professional services firm that provides construction services, as well as scientific and specialty consulting for a range of clients who include companies, organizations and government agencies. BoA set a $157 price objective on Jacobs, based on 15x 2022 estimated EV/EBITDA. The valuation is near the high end of JEC’s historical range of 9-16x, although BoA opined it was warranted due to the company’s improved cost structure, less cyclical portfolio and reduced exposure to riskier contracts.
Plus, BoA wrote it has observed momentum in certain areas of Jacobs’ business portfolio, including infrastructure, transportation, environmental services and re-shoring. The valuation given to Jacobs is in line with other government services and information technology stocks.
Chart courtesy of www.StockCharts.com
Risks to Jacobs meeting the price objective given it by BoA include possible lessening of the public spending outlook due to federal, state and local budget funding; a lack of organic free cash flow generation and integration after recent acquisitions; and overhang from an ongoing dispute related to a power project in Australia. Potential catalysts that could fuel the stock beyond the price objective, BoA wrote, are a bigger-than-expected infrastructure bill at the state and federal level; a more favorable outlook for Departments of Defense and Energy funding; and bigger-than-expected synergies following acquisitions and technology investments.
Jacobs Is Another One of the Environmentally Aware Three Infrastructure Stocks to Buy
Jacobs also announced on July 21 that it aims to serve its clients in alignment with the United Nations Sustainable Development Goals (SDGs). That approach ties profitable growth with positive societal impact. Those values will be integrated into the overall company strategy to become a differentiator in attracting and retaining top talent, company management said.
Jacobs identified six core SDGs through stakeholder engagement and a materiality assessment. The SDGs have been boiled down into the following sustainable business objectives:
- Advance the health and wellbeing of society
- Deliver solutions for the global water and sanitation crisis
- Foster a culture of technology and innovation important to the advancement of society
- Create a fair and inclusive future for all
- Develop efficient and resilient solutions that deliver net environmental and societal gain
- Accelerate solutions that address the climate emergency
These objectives “sit at the heart of the company strategy” and define Jacobs’ responsibilities to its organization and its stakeholders, its management said.
“As a purpose-led company, we recognize that our biggest opportunity to positively address climate change and societal inequalities comes from the solutions we provide our clients — from the world’s largest infrastructure projects to mission-critical outcomes and sustainable design,” said Jacobs Chairman and CEO Steve Demetriou. “We consider it not only good business, but our obligation to channel our expansive capabilities in resilient infrastructure, regenerative design, clean water, green energy and social value toward benefitting people and the planet, while continuing to outperform and drive superior stakeholder value.”
New Contracts Help Spur Jacobs’ Growth as One of Three Infrastructure Stocks to Buy
On June 24, Jacobs announced it won a new U.S. Army Corps of Engineers (USACE) Kansas City District Architecture and Engineering (AE) contract to support the planning, design and construction of facilities and infrastructure in service of the Air Force’s B-21 mission. The Multiple Award Task Order Contract (MATOC) supports AE requirements at Ellsworth Air Force Base (AFB), South Dakota; Dyess AFB, Texas; Whiteman AFB, Missouri; and other locations as the Air Force determines support for the B-21 program.
USACE values the shared contract capacity at $200 million, with individual task order limits of $50 million. The pact has an initial five-year base period, with a two-year option. AE services include master planning, investigation and studies, and preparation of construction documents, including training, squad operations, weapons training and engine test shop facilities.
On May 28, the company reported winning a $6.4 billion, 10-year contract for US Department of Energy’s Idaho Cleanup Project (ICP) at the Idaho National Laboratory. Jacobs has been named the majority partner in the Idaho Environmental Coalition LLC, which includes members from Jacobs and North Wind Portage.
Delta Variant of COVID-19 May Affect Three Infrastructure Stocks to Buy
The highly transmissible Delta variant of COVID-19 has raised growing concerns from health experts about a new spike in the spread of the virus across the United States. The Centers for Disease Control and Prevention (CDC) is blaming the variant for new surges in case numbers and deaths.
However, the variant is leading to an increase in the number of people vaccinated from COVID-19. As of Aug. 17, 198,929,642 people, or 59.9% of the U.S. population, have received at least one dose of a COVID-19 vaccine. The fully vaccinated total 168,897,604 people, or 50.9%, of the U.S. population, according to the CDC.
COVID-19 cases worldwide, as of Aug. 19, total 208,535,803 and led to 4,381,717 deaths, according to Johns Hopkins University. U.S. COVID-19 cases reached 37,009,359 and caused 623,297 deaths. America has the dreaded distinction as the country with the most COVID-19 cases and deaths.
The three infrastructure stocks to buy can help investors to pursue profits with the support of increased government spending on roads, bridges, runways and other public projects. Expanded federal spending on such projects appears headed toward becoming law and the three infrastructure stocks to buy should be among the beneficiaries.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and
DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing!
