Infrastructure Stock to Keep an Eye On

Dear Rich Lifer,

President Joe Biden’s next big bill is already starting to make headlines. The $1.9 trillion Covid relief bill seems to already be old news, and now, all eyes are on a potential infrastructure bill. 

As we covered last week, this bill will likely be hotly contested between Democrats and Republicans, regardless of the fact that improving infrastructure is a generally bipartisan ideal. 

There’s no doubt about it: America needs improved infrastructure. The American Society of Civil Engineers (ASCE) assigned the U.S. an infrastructure grade of C-minus in its latest quadrennial report, a small improvement from the previous D-plus rating.

The ASCE’s 172-page report highlights many needs such as bridge repair, road construction and maintenance, the continuing expansion and modernizing of the electric grid, and various water-quality initiatives. 

So, it’s no surprise that work on an infrastructure package is already underway with Congress and the Biden administration hashing out the details of what looks to be a multipart plan. 

And while the White House is declining to elaborate on the specifics of the plan, Wall Street is ready to get involved. Investors are already outlining the best infrastructure stocks that stand to benefit from the potential deluge of spending. 

Today, we will highlight a few of the best stocks that investors anticipate will be crucial to have in your portfolio this year…

King of Aggregates 

Vulcan Materials (VMC, $161.82) is America’s largest producer of construction aggregates, including things like crushed stone, sand and gravel, and a major producer of asphalt and cement. Aggregates make up 76% of the company’s revenues and 91% of its gross profit. 

President Biden has been vocal about funding roads and highway projects. So if you expect to see lots of roads paved and repaired, Vulcan should not be overlooked. 

Vulcan’s sales mix is spread evenly between private-sector buyers and government buyers. Because it has a firm foot in the private sector, any increase in home construction, which is desperately needed, would be enough to give Vulcan a big boost. 

Vulcan anticipates that it will earn $1.34 billion to $1.44 billion in adjusted EBITDA in 2021. At the midpoint, that would be roughly 5% growth from 2019. Management also projects double-digit-percentage growth in earnings from continuing operations in 2021.

Vulcan also checks off the “buying American” box, as it is based in Birmingham, Alabama and has over 360 aggregate facilities scattered throughout the country. 

Their current market value is $21.45 billion, and their dividend yield is 0.91%. 

Two Equipment Rental Companies to Consider 

Caterpillar (CAT, $224.14) has long been considered the most iconic maker of construction and mining equipment. Its easily recognizable trucks and machinery are at virtually every construction site in the world. It makes asphalt pavers, compactors, excavators, pipelayers, backhoes and just about anything you’d need for a major infrastructure project.

However, their sales sank in March 2020, bottoming out at $93.31 on March 15. Despite this, shares have more than doubled since then and seem to be continuing to rise. Their current market value is $119 billion, and their dividend yield is 1.82%. 

Although CAT has made huge strides in the market, investing legends and Motley Fool Co-founders David and Tom Gardner have picked a different equipment rental company to focus on this year: United Rentals (URI, $306.73)

United is the world’s largest heavy-equipment rental company. It operates 1,165 rental locations, 1,018 of which are in the U.S., and it runs two segments: General Rentals and Trench, Power and Fluid Solutions.

The General Rentals portion rents out traditional construction equipment such as backhoes, forklifts, earthmoving equipment, boom lifts, and more. Sales in this segment jumped by 13% year over year in the fourth quarter of 2020.

The Trench, Power and Fluid Solutions division rents out specialty equipment specifically designed for underground work and fluid treatment. This sector produced a quarter of United’s total revenue last year, compared to the 7% it produced in 2012. 

Shares of United have been exploding and have more than doubled since July 2020. Even further, equities analysts anticipate United will report $1.98 billion in sales for the current quarter. The market value of United Rental is currently $22 billion. 

All Eyes On Steel 

What is one material needed to build roads, dams, pipelines and rail lines? Steel. 

Right now, the company at the forefront of the steel industry is Nucor (NUE, $71.21), the largest domestic steelmaker in the U.S. 

Nucor is already established as a highly efficient company with a strong balance sheet. The Motley Fool contributor Neha Chamaria writes:

Nucor’s cost-effective mini-mills utilize electric arc furnaces instead of blast furnaces, and have a greater capacity to adjust production in response to rising and falling demand. In addition, Nucor’s key raw material, induced iron, comes from scrap the company itself recycles. This vertical integration has hugely driven its growth in the past and positions it well to benefit from an infrastructure boom.

Things are going so well for Nucor they pre-announced that their first-quarter earnings for 2021 would set a company record. Even further, Nucor has increased its dividend for the 48th consecutive year — that payout now yields 2.28%.

If the company is already delivering never-before-seen profits, there’s no telling how an influx of infrastructure spending will affect the already booming steelmaker. 

This is also another company where the “buy American” aspect Mr. Biden champions will help by giving it an edge over foreign competitors such as Luxembourg’s ArcelorMittal (MT) or Japan’s Nippon Steel (NPSCY). 

The market value of Nucor is $20 billion and as we mentioned above, their dividend yield is 2.28%.  

Remember, it’s always best to be cautious and diversify. If an infrastructure plan fails to materialize, many of these stocks could fall in response. 

To a Richer Life,

The Rich Life Roadmap Team 

 

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