Rebuilding America: An Infrastructure Trio

05/09/2014 10:00 am EST

Focus: STOCKS

Despite wrangling in Washington over spending on infrastructure, the need for rebuilding in the US continues to increase. Here, John Persinos of Personal Finance looks at the situation and highlights a trio of favorite stocks poised to benefit from these needed repairs.

Steve Halpern: Joining us today is John Persinos of Personal Finance. How are you doing today, John?

John Persinos: Hey, I'm doing great, glad to speak with you.

Steve Halpern: Well, thank you for being here. You recently published a fascinating research article entitled Profit from the Rebuilding of America, and, in this particular case, you were talking about the disrepair of the US infrastructure and opportunities you saw to address that trend. Could you expand on that?

John Persinos: Yes, sure. Well, as we all know, the media is rife with fairly alarming stories about the disrepair of US infrastructure. This seems like, almost nightly on the news or newspapers, go online and see stories about bridges that have collapsed, trains that have exploded, ruptured gas lines.

There was an exploding gas line in New York City several weeks back where an entire building just was completely obliterated, and so, the evidence is mounting that the world's largest economy increasingly has the infrastructure of a third world country.

So, there are a lot of unmet, long deferred infrastructure needs in America but because of the fiscal austerity, concerns about the deficit, they're just philosophical differences between the Republicans and the Democrats. These infrastructure needs have not been met, but that's changing now and this is a little noticed trend.

It's a big trend, but investors and political observers really have given this trend short trip, which is that states and localities are taking things into their own hands, that, while Congress dithers and feuds, the state and local leaders are taking action.

According to the National Organization of State Budget Officers, most governors have successfully pushed through big increases in infrastructure spending for 2014 and beyond, financed by bond issues, toll increases, special taxes, and innovative private/public partnerships.

So, what's not happening on the federal level is happening on the state level, and so, it's almost a contrarian play. In fact, it is a contrarian play because if you were to ask most investors, “do you think there would be a build-up in infrastructure building construction?” they would say no, because they see a gridlock in Washington.

But what they're ignoring is the increase in expenditures at the state and local level, and I think there are three construction companies that are well poised to benefit, to profit from the growing campaign to fix the country's crumbling infrastructure.

Steve Halpern: Okay, let's take a look at those three companies that you've been recommending in this area, and, among that trio, you begin with Fluor (FLR). What's the attraction behind that company?

John Persinos: Dominance, sheer size, lobbying clout, its entrenched position. With the market cap of $12.1 billion, Texas-based Fluor is—well, it's a Texas sized company—it's the largest and most diversified company in its sector. It provides engineering construction, maintenance, and project management services around the globe.

It has fingers in many mammoth transportation projects, specifically, for example, and within the context that I just provided, in Washington DC's infamously congested capital beltway, Fluor recently completed and now operates and maintains new toll lanes along 14 miles of I-495.

The firm used debt and equity to finance about $1.5 billion of the project's $2 billion cost. Fluor is now partnering with the State of Virginia to finance, build, and manage new roads and toll lanes south from the beltway along I-95.

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So, Fluor is a major player when it comes to infrastructure construction, and another thing I like about Fluor, its revenue mix provides a measure of stability in an otherwise cyclical business.

It has a big presence in the booming energy patch, particularly shale development in North America, and that will continue to drive upstream infrastructure work for Fluor—and Fluor is a major player in nuclear power, and despite a lot of claims of the contrary, nuclear power is not dead. In fact, it's undergoing a resurgence after the Japanese nuclear disaster.

The Japanese are now reconsidering—in fact they are not just reconsidering it, but they are restarting their nuclear power plants—and China has many nuclear power plants on the drawing boards, and Fluor is a major player in the nuclear story, which is a place for a big rebound, so diversification and an entrenched position in American infrastructure projects makes Fluor a really good bet.

Steve Halpern: Now, you also point to a company called Martin Marietta Materials (MLM), which makes aggregates that are used in the instruction of roadways. Could you explain this market and your outlook for the company?

John Persinos: Yes, sure. Martin Marietta produces aggregates. What are aggregates? It's crushed stone, gravel, and sand, and it's mixed with cement to create concrete, a type of concrete that is a staple of highway and roadway construction.

Martin Marietta also produces chemical additives for ceramics and water treatment, as well as fiber-reinforced polymer products for use in bridge decks, truck trailers, railroad cars, resident construction. The company maintains several Redi-Mix concrete operations in the United States.

It's the country's second largest producer of construction aggregates, and it operates about 300 quarries, distribution yards, and factories, and all of this capacity is going to get a big boost as highway construction increases in the United States.

Steve Halpern: Now finally, of the trio of stocks that you recommended in the sector, you point to AECOM Technology (ACM), which offers services for construction projects. Could you tell us a little more about AECOM?

John Persinos: Sure. AECOM is an acronym for Architecture, Engineering, Consulting Operations, and Maintenance, and that's definitely, that's an apt summary of its many interests.

AECOM is a global provider of planning, consulting, engineering, architectural, and construction management services for highways, bridges, airports, mass transit systems, government and commercial buildings, et cetera, et cetera.

It's a long list, so like Fluor, AECOM has a large global footprint that helps cushion it from the budgetary vicissitudes. It doesn't have all its eggs in one basket, but it's a project management, and consulting, and engineering firm, as opposed to Martin Marietta and Fluor.

It's more in the knowledge business, and it serves clients in more than 150 countries, especially emerging market nations that have made huge commitments to building infrastructure.

And AECOM recently received two major transportation contracts from the US government, one for $730 million and another for $700 million, and these things, they bode well for the coming year as budget concerns wane and the economic recovery continues, and state, local, and federal leaders finally focus on America's infrastructure.

We're looking at trillions of dollars in future spending and these companies are in a real good position to get the lion's share of that largess.

Steve Halpern: We really appreciate you taking the time today. Thank you for joining us.

John Persinos: Hey, it was my pleasure.

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