Four Construction Equipment Infrastructure Stocks to Buy Rev up Growth Engines

Paul Dykewicz

Four construction equipment infrastructure stocks to buy rev up growth engines for investors who expect government spending on public projects to receive a boost.

The four construction equipment infrastructure stocks to buy feature both sellers and lessors of big machinery needed to build roads, bridges and power generation projects, as well as assist in agricultural and forestry initiatives. The Democrat-led U.S. House of Representatives, in a 220-212 vote on Aug. 24, approved a $3.5 trillion budget bill and locked in a vote by Sept. 27 on a Senate-passed $1.1 trillion infrastructure bill, halting an open dispute about the Democrats’ political agenda between 10 centrist lawmakers and House Speaker Nancy Pelosi, among other party leaders.

Construction equipment stocks should benefit from the infrastructure bill, which includes $550 billion of increased funding for roads, bridges, expanded broadband and water system upgrades around the country to avoid the lead-leaching pipes that led to illness and deaths in my hometown of Flint, Michigan. That legislation also would reauthorize existing federal infrastructure programs.

‘Mr. Wonderful,’ Shark Tank’s Kevin O’Leary, Predicts Passage of Legislation

“One way or another, infrastructure spending increases will pass because it has political support from both sides of the political aisle,” said Kevin O’Leary, chairman of Boston-based O’Shares ETFs.

“This kind of infrastructure spending hasn’t really happened in the U.S. since the ‘50s,” O’Leary said.

Plus, broadband has become important to support the new digital economy that has “emerged out of the pandemic,” O’Leary said. Broadband became a key part of the infrastructure bill to help bring internet access to rural and other underserved areas.

Passage of the legislation will supply liquidity to the market, and many companies that provide infrastructure goods and services will benefit, O’Leary said.

Paul Dykewicz interviews Kevin O’Leary, chairman of O’Shares ETFs.

Four Construction Equipment Infrastructure Stocks to Buy Can Be a Good Inflation Hedge

The federal budget and infrastructure legislation moving through Congress helps construction equipment 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. Infrastructure stocks have been recommended by Carlson during the past last few years, even before the legislation, due to the strong need for upgrading or replacing crumbling roads and bridges in the United States and elsewhere, he added. 

Infrastructure stocks can be a good inflation hedge, said Carlson, who also heads the Retirement Watch investment newsletter.

Pension fund and Retirement Watch chief Bob Carlson answers questions from columnist Paul Dykewicz.

Investors who like infrastructure stocks as an inflation hedge can consider DWS RREEF Real Assets (AAASX), Carlson told me. The fund is actively managed and invests in infrastructure stocks, real estate investment trusts, Treasury Inflation-Protected Securities (TIPS), gold and most commodities, he added. 

“The managers adjust their allocations to the different asset classes based on their view of where the economy is in its cycle,” Carlson continued. “They have a solid record of making timely changes and also making a good selection within each asset class.”

The fund is up 16.35% so far in 2021 and 26.36% during the past 12 months.

Four Construction Equipment Infrastructure Stocks to Buy Feature Caterpillar

Caterpillar Inc. (NYSE:CAT), a Deerfield, Illinois-based American Fortune 100 company that is the world’s largest construction-equipment manufacturer. designs, develops, engineers, manufactures, markets and sells machinery, engines, financial products and insurance to customers via its worldwide dealer network. The established company is not growing lightning fast, but it is far from fizzling out either.

BoA Global Research assigned a $223 price objective to CAT, based on 19x 2022 estimated earnings per share (EPS), topping the stock’s long-term historical range of 16-17x, due to the current low interest rate environment, above average market price-to-earnings (P/E) multiple and early stage of the construction cycle. While end-user dealer sales are stabilizing and poised to recover, the trajectory could be constrained as mining and oil & gas customers continue to favor shareholder returns rather than capital spending, BoA wrote in a recent research note.

Chart courtesy of www.StockCharts.com

Potential risks that could prevent Caterpillar from reaching the BoA price objective are a widening global coronavirus pandemic that might tilt the global economy into recession; a greater-than-expected reduction or delay in capital spending among large mining and oil and gas customers; intensifying pricing pressure in the construction and mining equipment industries; and legal risks due to current regulatory probes. Another possible problem could be any sustained deterioration of dealer sales growth.

On the other hand, possible reasons BoA gave for Caterpillar to surpass expectations include a faster-than-expected recovery in the global economy; a firming earthmoving construction equipment market; limited oil & gas contagion risk from electric power, construction and marine markets; continuing recovery in commodity prices; and stronger-than-expected demand trends in gas compression. Yet another factor could be quicker-than-expected resolution to the pandemic.

Four Construction Equipment Infrastructure Stocks to Buy Include Two Picks from Market Veteran

Although BoA currently shows a “neutral” rating for Caterpillar, seasoned stock picker Jim Woods lists it as a “buy” for his Intelligence Report readers.

Paul Dykewicz meets with investing veteran Jim Woods, who heads Bullseye Stock Trader.

“The economic reopening trade, also known as the reflation trade, has been felt most in cyclical and value stocks, and particularly in bellwether industrial companies,” said Jim Woods, editor of the Successful Investing and Intelligence Report, as well as the leader of the Bullseye Stock Trader advisory service. “Two of the best-run, and best-positioned industrials are Caterpillar (CAT) and Cummins Inc. (CMI). Both have strong earnings growth, yet both stocks have seen some selling since June. For long-term investors, this recent pullback represents a good buying opportunity in two stalwart dividend stocks.”

Cummins Gains Place Among Four Construction Equipment Infrastructure Stocks to Buy

Cummins Inc. (NYSE:CMI), of Columbus, Indiana, designs, manufactures, and distributes engines, filtration and power generation products. BoA has given Cummins a “buy” recommendation and a 12-month price objective of $325, based on 14.3x 2022 estimated EPS and an assumed $3.6 billion valuation for its New Power segment.

Historically, Cummins has traded at a low- to mid-teens P/E. While some observers view BoA’s $20 EPS forecast as a peak, the investment firm wrote a recent research note predicting Cummins would rise above $20 of EPS through the next cycle when the current one eventually bottoms somewhere in the 2024 timeframe.

Chart courtesy of www.StockCharts.com

Potential risks that could stop Cummins from achieving BoA’s price objective include a disorderly spike in interest rates leading to aggressive Fed policy tightening; a hard landing for the China or North American heavy-duty truck market; and faster-than-expected full battery electric vehicle (BEV) penetration without a commensurate number of offsetting wins from Cummins.

Catalysts for the stock could come from a sustained recovery in the North American heavy duty truck cycle; positive developments in the Cummins hydrogen efforts; stronger-than-expected resilience in China’s truck market; democratic government drive for new emission regulation; and a large, accretive acquisition.

Deere Gains Spot Among Four Construction Equipment Infrastructure Stocks to Buy

Deere & Co. (NYSE:DE), of Moline, Illinois, is a manufacturer of agricultural, construction and forestry machinery, along with diesel engines, drivetrains used in heavy equipment, as well as lawn care equipment. The company received a “buy” recommendation from BoA, along with a $425 price objective, based on 20x the equipment company’s fiscal year 2022 estimated earnings per share forecast. 

BoA’s target 20x price-to-earnings multiple is at a 12% premium to the average P/E during the last five and 20 years of 18x P/E. However, BoA called it justified, since Deere may be the highest quality large-cap machinery stock with both cyclical and structural tailwinds due to its position as the industry innovator in precision agriculture.

Chart courtesy of www.StockCharts.com

Potential risks to the price objective and “buy” rating that BoA assigned to Deere are the widening coronavirus pandemic that weighs on the global economy and if the used equipment market takes a downturn and causes large residual value impairments. Other possible risks include any reversal in the extended improvement in commodity prices, as well setbacks in construction equipment coming out of Europe, where Deere has been trying to integrate the operations of Wirtgen Group, formerly a privately held international construction machinery company.

Four Construction Equipment Infrastructure Stocks to Buy Include Equipment Rental Company

Bonita Springs, Florida-based Herc Holdings Inc (NYSE:HRI) is one of the largest equipment rental companies in North America. Herc Holdings generated total revenues of nearly $1.8 billion in 2020 by offering its customers a diversified fleet of equipment valued at $3.6 billion through approximately 277 locations, primarily in North America.

BoA’s price objective for Herc is $160 per share, or 6.5x 2022 estimated enterprise value/EBITDA. The investment firm’s 6.5x target multiple is about one turn above the mid-point of the historical 5-6x EBITDA multiple range, which Boa wrote seems justified given the improvement in performance through the cycle versus historical comparisons. At $160 per share, the stock would still only be trading at a 50% premium to replacement cost, above the historical average of trading at or just below replacement, BoA wrote.

Chart courtesy of www.StockCharts.com

Potential risks that BoA cautioned could cause Herc to fall short of reaching the investment firm’s price objective include a double dip recession; a disorderly spike in interest rates, renewed weakness in the energy markets; slower-than-expected recovery in rental rates; and turmoil in the debt markets. Possible catalysts that could boost the stock beyond BoA’s share price estimates could come from a sharper-than-expected economic recovery or bounce in oil prices, or that the company is eventually bought as the U.S. equipment rental market consolidates

COVID-19 Adds Risk to Four Construction Equipment Infrastructure Stocks to Buy

The highly transmissible Delta variant of COVID-19 has raised concerns among health experts about a surge in virus cases and deaths across the United States. The Centers for Disease Control and Prevention (CDC) is blaming the Delta variant for the spikes 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. 24, 202,041,893 people, or 60.9% of the U.S. population, have received at least one dose of a COVID-19 vaccine. The fully vaccinated consisted of 171,367,657 people, or 51.6%, of the U.S. population, according to the CDC.

COVID-19 cases worldwide, as of Aug. 24, totaled 213,098,413 and led to 4,450,408 deaths, according to Johns Hopkins University. U.S. COVID-19 cases reached 38,053,653 and caused 630,663 deaths. America has the dreaded distinction as the country with the most COVID-19 cases and deaths.

The four construction equipment infrastructure stocks to buy are worth considering by investors who seek profits from growing government spending on roads, bridges and other public projects. Increased federal spending on such projects seems destined to become law and the four construction equipment infrastructure stocks to buy should be fueled by the funding.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA 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 othersCall 202-677-4457 for special pricing!

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