President Biden unveiled his “American Jobs Plan,” a proposal to spend $2.3 trillion to upgrade the country’s infrastructure over eight years. Biden proclaimed the plan a “once-in-a-generation investment in America,” asserts Rich Moroney, editor of Upside, a specialized service focused on small cap stocks.
Biden’s plan is as broad as it is bold. It calls for the U.S. to update roads and bridges, expand public transportation, roll out a network accommodating electric vehicles, reduce utilities’ carbon emissions, replace all lead pipes and service lines, update public schools, expand internet access for rural communities, and support semiconductor manufacturing and research.
It also proposes significant investment in caring for the country’s elderly and disabled. Biden aims to fund the plan over 15 years by raising both the U.S. corporate tax rate and the minimum tax on U.S. companies’ foreign profits.
Higher taxes would create a drag on corporate profits, especially for the companies that saw the largest tax rate declines from the 2017 tax cuts. Still, the higher taxes may be phased in gradually. And the higher tax burden would be at least partially offset in two ways.
First, some companies would benefit from the higher direct infrastructure spending, which could reach about 4.5% of U.S. gross domestic income, the highest level since the early 1970s, according to Goldman Sachs.
Second, a larger group of companies would enjoy productivity gains from the infrastructure improvements, such as lower transportation and energy costs, along with better access to larger markets.
Even if the bill’s total price tag is ultimately slashed, many of our stocks still stand to benefit because infrastructure spending in their sectors is overdue and necessary, such as revamping the country’s electrical power grid.
In the proposal’s current form, top winners include companies leveraged to clean energy, construction, communications-hardware, and semiconductor equipment.
Atkore (ATKR) makes electrical raceway products, metal framing, and construction services; demand for these products should get a boost from the wave of new construction promised by President Biden’s infrastructure bill. Key end markets for Atkore include new construction, alternative power generation, and the U.S. government.
Atkore’s earnings per share are projected to climb 55% in fiscal 2021 ending September, The current fouranalyst consensus for fiscal 2022, calling for a 14% profit slump, seems unduly bearish. Expectations also seem conservative for long-term sales growth, projected at a modest 2%.
Atkore shares have surged 90% this year but still look attractively valued. The stock has a trailing P/E ratio of 17, versus the median of 26 for electrical components stocks in the S&P 1500 Index.
If Atkore’s trailing P/E rises to 18 and it meets the consensus profit estimate of $5.86 per share for fiscal 2021, the shares would reach $105 by November. Atkore is a Buy.
Few companies are better positioned to benefit from an infrastructure bill than Eagle Materials (EXP), which supplies cement and wallboard to the infrastructure, commercial and residential construction markets.
Infrastructure spending drives about half of U.S. cement demand, followed by homebuilding as the second-biggest driver. With housing inventories near historic lows, Eagle should get a boost from continued growth in residential construction.
Eagle says state budgets are holding up better than some investors had feared at the onset of the pandemic, which should support low-single-digit growth for concrete demand, even without federal support. The consensus expects Eagle’s per-share profits to rise 13% in fiscal 2022 ending March on 6% higher revenue.
Over the next five years, profits are projected to rise at a 7% clip on annualized revenue growth of 8%. Although analyst estimates have marched higher over the past 90 days, expectations still seem modest given the magnitude of the U.S. infrastructure bill circulating through Congress. Eagle Materials is a Buy.
A key player in the electrical-construction industry, MYR Group (MYRG) has attracted a customer base that includes utilities, independent power producers, and industrial and transmission companies.
The migration by utilities toward renewable energy should be a significant source of growth for MYR. By 2050, the U.S. Energy Information Administration expects the share of renewables in the U.S. electricity generation mix to double to 42%.
Last year MYR grew earnings per share 55% and revenue 9%, while operating cash flow nearly tripled. With free cash flow totaling $131 million in 2020, versus just $7 million in 2019, MYR used excess cash to pay down long-term debt.
The backlog grew 10% to $1.65 billion in 2020, accounting for nearly three-fourths of annual sales. Although earnings per share and revenue are projected to rise just 4% this year, analysts expect growth to accelerate in 2022. MYR is a Best Buy.