A recent tweet from President Trump has brought infrastructure stocks back into the limelight.
With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4
— Donald J. Trump (@realDonaldTrump) March 31, 2020
Trump's ambitious infrastructure bill has been in the waiting for years, but there's hope his plans could finally take concrete shape now that the COVID-19 pandemic has pushed world economies, including the U.S., to the brink of a recession.
Industry experts opine that an infrastructure stimulus could spur manufacturing, trade, and commerce activity and create much-needed jobs to help the economy recover from the unprecedented coronavirus setback. It's a valid argument that also reinforces the urgent need to invest in America's crumbling infrastructure. When, how, or if Trump's $2 trillion infrastructure program will materialize remains to be seen, but investors might as well take a cue and add some infrastructure stocks to their watchlist this month.
Infrastructure is a huge sector, consisting of stocks of companies ranging from builders and operators of hardcore infrastructure assets like bridges, tunnels, waterways, power and gas grids, and transit systems to manufacturers of equipment and building materials, and infrastructure and engineering service providers.
So for a broad-based idea to stay updated about the infrastructure sector, I'd watch Nucor (NUE 1.60%), Vulcan Materials (VMC 2.87%), and Caterpillar (CAT 1.47%). Here's why.
It's time to add infrastructure stocks to your radar. Image source: Getty Images.
Don't overlook this infrastructure stock anymore
After an incredible 46% run-up in 2019, shares of Vulcan Materials are down almost 30% so far this year. Vulcan is the nation's largest manufacturer of construction aggregates, primarily crushed stone, gravel, and sand, as well as a major producer of asphalt and concrete. As these are basic raw materials used in the construction of nearly all forms of infrastructure assets, Vulcan should appeal to anyone interested in investing in infrastructure stocks.
I like four things about Vulcan:
- Dominance in the aggregates industry.
- Equal exposure to private and public infrastructure end markets.
- Solid foothold in key states like Texas, California, Virginia, Tennessee, and Georgia. These five contributed 61% to Vulcan's 2019 revenue.
- Prudent capital allocation policy: prioritization of growth over dividends and share buybacks.
In 2019, Vulcan's revenue grew 12% to $4.9 billion and net income surged 20% to $618 million. It spent $239 million on operating and maintenance, $165 million on growth projects, and $167 million on dividends and share repurchases. Vulcan's balance sheet presents a sturdy picture, with cash flows rising steadily in the past five years and debt at comfortable levels.
VMC Total Long Term Debt (Annual) data by YCharts
With the stock trading at less-than-half its five-year average P/E ratio, Vulcan is a great infrastructure play to add to your radar now.
Key earnings report coming up in April
It's impossible to ignore Caterpillar when you're talking about infrastructure, simply because its businesses encompass several industries within the critical manufacturing sector, including:
- Heavy machinery, engine, and turbine.
- Transportation (locomotives).
- Electrical equipment (generators).
That explains why Caterpillar is often consider an economic bellwether: Its demand and sales reflect the health of the economy. If infrastructure spending picks up, Caterpillar should be a leading indicator as the world's largest construction-and-mining equipment manufacturer.
The coronavirus outbreak has struck Caterpillar hard: Its three-monthly rolling retail machinery sales are decelerating, and supply chain has faced disruptions, forcing Caterpillar to suspend some of its operations and withdraw its 2020 financial outlook, which was already dismal to say the least.
But Caterpillar's signature yellow machines will undeniably play an integral part when America starts rebuilding itself, making the stock a must-watch. Caterpillar will release its first-quarter earnings on April 28, so it's best you don't miss management's outlook about the company's product and geographic end markets as well as the overall economy. Stay tuned.
This company's resilience could surprise you
Steel is indispensable to build lasting infrastructure assets, whether its bridges and rail tracks or water pipelines. With 25 scrap-based steel mills and annual production capacity of 27 million tons, Nucor is North America's largest manufacturer and supplier of critical infrastructure steel and steel products.
"Scrap-based" is the key word here, one that has catapulted Nucor to the forefront of the steel industry. Unlike most steel companies, Nucor doesn't rely on capital-intensive and inflexible blast furnaces but produces steel from scrap through electric arc furnaces at its mini-mills. It's a cost-effective method that can flex production volumes, which explains Nucor's resiliency through economic cycles, reflected partly in its 47 consecutive years of dividend increases. Nucor is among the few cyclical stocks to achieve Dividend Aristocrat status.
NUE Total Long Term Debt (Annual) data by YCharts
Nucor shares have dropped nearly 37% so far this year, yielding 4.5% in dividend. Nucor's first-quarter earnings are expected this month, and while it has seen minimal impact from COVID-19 pandemic so far, watch the numbers closely. Specifically, keep an eye on Nucor's debt and cash level, target dividend payout ratio, and capital expenditure plans, as they should tell you two key things: how Nucor will ride out the present storm and prepare itself to make the most of any uptick in infrastructure activity.
