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Roads, Rails, & Refineries

10/08/2004 12:00 am EST


Neil George

Editor, Profitable Investing

"Moving people and things is a cornerstone our economy, and we are primed for a ‘transportation reckoning’," says Neil George, editor of Personal Finance. Here, he looks at major infrastructure reconstruction needs from roads, rails, and refineries.

"According to the Texas Transportation Institute, you and your neighbors are wasting more than 46 hours a year stuck in traffic. And the cost of those squandered hours has jumped fivefold in the past 20 years, to more than $60 billion a year. In addition, a cornerstone of our economy is freight. According to the Bureau of Transportation, the surge of freight being shipped throughout the US has jumped to 42 million tons a day. And around 64% of the dollar value of that stuff is moved on trucks on those jammed roadways. Then there’s the airline industry. If you’ve been stuck in Chicago or Miami, you know all too well the costs of the lack of runway and flight management space. Rail lines that haven’t been significantly expanded in more than half a century.

"And of course there’s all of that fuel—from petrol for cars to diesel for those trucks and rail locomotives—that has to be refined and delivered. But despite the rising demands, no new refineries have been built since the US bicentennial. The US can’t operate and grow without fixing what moves the economy. Fortunately, there are a number of companies that are part of the solution. Here are the companies you need to become aware of, follow and buy in small batches over time. Each contributes an important piece to easing our economic choke points:

"First, we start with the road work side. Roadway construction and reconstruction are led by a handful of biggies. Ashland (ASH NYSE) was formed back in 1917. You may be familiar with the company for its role in the petroleum industry. But Ashland has shifting its focus toward major construction. The freed up cash will go far to eliminate a chunk of debt and will give the company a solid footing to bolster its construction business. They are very good at booking giant government contracts. Asland is a company to reckon with both in the US and overseas. Buy up to 55.

"There are also some smaller players that provide the components that go into roadway construction and repair. One company that is interesting is Martin Marietta Materials (MLM NYSE). Martin Marietta is known for airplanes. But the Materials company is in the aggregates business, turning big rocks into smaller rocks. If you are going to build a road, a new airport runway, or any major concrete project, MLM will likely be getting some of those contracts. A pure US play is Sterling Construction (STV AMEX). This company continues to build a good book of business for municipality, counties, or states that need to lay roads. Sterling keeps booking projects, boosting revenues by a two-year average of more than 80%. Martin Marietta and Sterling are buys up to 45 and 3.60, respectively.

"One of the next areas we need to deal with is rails. Rail lines are completely overburdened and under maintained – to the point that many railroads have to run their lines at reduced speed. We have major logjams in hubs. This is where L.B. Foster (FSTR NASDAQ) comes in. Sales growth has been slow but it has a lock on its railroad clients—nearly 100% of the industry buys from them. They are just about the only company left that makes rails. Eventually this company is going to get major contracts. Like others in this sector, the stock trades at a huge discount to rising revenues, making LB Foster a buy up to 9.

"In addition to rail lines, the rail cars are now at an average age of more than 30 years. This rolling stock needs to be built, delivered, or at least refurbished and serviced. Greenbrier (GBX NYSE) provide servicing to the rail industry. And they’re set to capitalize on the needs of the aging and stressed railroad system. Another company that provides new rail cars is Trinity Industries (TRN NYSE). This is one of those companies to keep on a watch list for when you start to see more discussion about the state of rail lines. Both stocks can be picked up for a song, relative to sales revenue values. They’re great buys in small batches up to 25 for GBX and 35 for TRN.

"In addition to roads and rail, there is shipping. The dominant port operator is Hutchison Whampoa (HUWHY OTC). It is a very large conglomerate that was put together in the late 1800s. Its claim to fame is its dock facilities in and around China. Nothing moves in or out of China without paying this company. They've also expanded their shipping facilities and now stretch around the entire planet, from China to the Panama Canal. In addition, the company also has major telecommunications, energy and retail operations. It’s a big, broad play on global infrastructure. I think this is a company that everyone should have in their portfolio. Hutchison remains a solid long-haul buy up to 55

"Another major infrastructure area is refineries. We haven’t seen any new refinery construction in the US for a long, long time. That’s been one of our major problems, and that’s been one of the problems with oil prices. This is not just a US problem. Asia also needs refineries, and that’s where we see a lot of construction need. And there aren’t a lot of companies that can build a refinery. One of the majors that can provide turnkey refinery construction is Fluor (FLR NYSE). The firm was founded back in 1890, so the chances of them being around for a while longer are pretty good. Fluor is a behemoth that is great at getting government contracts for massive projects and constructing runways at airports. that that can address many of our economic issues. Fluor is a great one to buy when it’s down, in small batches up to 50. It won’t hurt to have some of this stock in your portfolio.

"Another player in this field that is a little more aggressive is Maverick Tube (MVK NYSE). It’s been a sleepy company until very recently. MVK supplies the essential parts – like fuel pipes and tubes – to companies like Fluor. It is the pipe maker of choice. It’s not large, but it’s starting to get attention. It’s a well-managed, steady performer that’s remained below Wall Street’s radar and has only recently begun to get attention as the refinery challenges are moving to the front page. Don’t chase the stock. I think it’s a value under 29 and is well worth buying on pullbacks – not just for the near term, but for the long haul as it provides for infrastructure projects for refineries and oil service projects around the world."

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