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5 infrastructure boom bets
Infrastructure projects are everywhere. Here are the companies supplying the construction materials, building the factories and then tying them into transportation and power grids.
By Jim Jubak
Could this be the great age of infrastructure spending? The decade, or more, when the world spends big on everything from power lines to oil refineries to loading docks to liquid natural gas plants in order to catch up with exploding demand after a decade of underinvestment?
Anecdotally, yes. No matter what corner of the globe you search somebody is lamenting the need for more infrastructure, cataloging the cost of inadequate infrastructure and planning to spend billions building it.
India, home of the world's fourth-largest coal reserves, imported 30 million to 40 million tons of coal in the fiscal year that ended in March because the country's mines can't produce enough coal. Making matters worse, its ports and rail system can't get imported coal to India's power plants.
Australia's booming commodity economy can't meet global demand for iron ore, coal, copper and other basic materials because the country's ports can't accommodate all the ships that want to load and unload. That problem isn't unique to Australia. Rotterdam and Antwerp, two of Europe's three busiest container ports, had to keep ships waiting for days during the ports' peak shipping season.
Japan's Mitsubishi Heavy Industries is considering buying Westinghouse Electric, a U.S. maker of nuclear power plants, from British Nuclear Fuels for $2 billion. The prize that makes the bid worthwhile? China's plans to build 40 nuclear power plants over the next decade or two.
Clearing roadblocks
And here in the United States, where no new oil refineries have been built since 1976, soaring gasoline prices have led the Bush administration to propose waving environmental regulations, giving away land on U.S. military bases and even creating national refinery revitalization zones in areas of high unemployment to get someone, anyone, to build a new a refinery or even restart an idled one.
The numbers support the anecdotes, too. At construction giant after construction giant revenues are nearing historic peaks, while orders continue to swell. For example, at Chicago Bridge & Iron (CBI, news, msgs), one of a handful of global companies with the expertise and experience to build the complex terminals required to turn natural gas into a liquid so it can be shipped to overseas markets in ocean-going tankers, the first quarter saw a record level of new orders and the backlog doubled from a year earlier.
Infrastructure trends like these play out over years, a much different time period than the six-month time horizon I use in picking the stocks I highlight in my appearances on CNBC's "Morning Call." But this trend has a short-term component, too.
In May, capacity utilization at the country's factories closed in on 80%, which is close enough to full capacity, history shows, to produce bottlenecks that slow production and increase costs. When that starts to happen, more companies decide to build more factories and, judging from the various surveys of capital spending plans, that's exactly what CEOs are thinking about doing.
And if they do, somebody has to supply the construction materials, build the factories, and then tie them into the national transportation and power grids.
In my regular 11:20 a.m. ET Wednesday appearance on "Morning Call" I picked these three infrastructure plays:
Making a gas a liquid
Chicago Bridge. Despite the company's name the story here isn't either bridges or iron but terminals for liquefied natural gas (LNG).There's a huge global mismatch between where natural gas comes out of the ground and where natural gas consumers live. In the U.S. we solve that by shipping gas by pipe from Canada. But pipelines won't do the job to get gas from places such as Indonesia and the Persian Gulf to places such as China, at least not enough of it.
The solution is to turn natural gas into a liquid by super-cooling it, pumping it into special tankers and then, after a long ocean voyage, turning it back into gas that can be sent through pipelines to consumers. Chicago Bridge is in the business of designing and building these storage and processing plants. That work, including LNG terminals in the United Kingdom, was the driver that tripling new business in the March quarter to $1.4 billion from $348 million in the first quarter of 2004.
But Chicago Bridge also is getting orders for plants to convert oil sands into oil, for building new refineries and for upgrading existing refineries to remove sulfur from fuel. Analysts project that the company will grow earnings by 41% this year and 22% in 2006. The stock trades at 26 times projected 2005 earnings and 21 times projected 2006 earnings. Our StockScouter rated the stock a 6 out of a possible 10 on July 13.
Transmission lines
General Cable (BGC, news, msgs). Want to send electricity from here to there? General Cable makes the big wires that let utilities do just that. The energy division, which accounted for 36% of revenue in 2004, saw revenue climb 10% in the first quarter on strong demand from utilities upgrading their transmission systems.
Want to move electricity around an automobile or other product? General Cable's flexible power cords do just that. Revenue in the industrial segment, which made up 37% of sales, climbed 3% in the first quarter.
Want to move voice and data over copper cables or optical fiber? General Cable makes the cable and the connectors to do just that. The communications segment, 27% of sales, grew revenue by 12% in the first quarter.
Overall revenue is projected to grow by 15% this year. With improvements in gross profit margins from closing underused plants, that should lead to a doubling of earnings per share (excluding one-time charges for closing plants).
The shares trades at 19 times projected 2005 earnings per share and at 14.8 times projected 2006 earnings. Our StockScouter rated the stock a 7 on July 13.
Pipe it through
Watts Water Technologies (WTS, news, msgs). It's hard to build a home, office or factory without the water pipes, valves and fittings that Watts Water Technologies makes.
With residential construction booming, these have been great times for Watts Water Technologies. Revenue climbed 17% in 2004 from 2003 and then jumped another 15% in the first quarter. Analysts expect that boom to produce earnings growth of 20% this year, but they're also calling for a drop in earnings growth to 13% in 2006 as the home building market cools. I think that overlooks the recovery under way in the commercial construction segment. Thanks to that recovery I don't see earnings growth dropping much from this year to next.
The shares trade at 19.3 times projected 2005 earnings per share and 17 times projected 2006 earnings. Our StockScouter rated the stock a 4 on July 13.
Exclusive picks
And as always, I have two more exclusive picks for CNBC.com on MSN readers.
Pentair (PNR, news, msgs). The logic here is very, very simple. In the last year Pentair has finished its transformation from an unfocused industrial conglomerate to a company specializing in just two markets: security enclosures (about 30% of sales) and water purification and transport equipment (about 70% of sales).
Why own a piece of a company in the water market? First, the U.S. water industry is projected to grow by 7% annually over the next five years. Second, the country needs to replace $250 billion in water pipes, valves, fittings, filters and the like in the next 30 years. And third, the Environmental Protection Agency projects $330 billion to $450 billion is needed in capital spending on the nation's waste water infrastructure over the next 20 years.
Wall Street projects 55% earnings growth for Pentair this year and 17% growth in 2006. The stock trades at 21 times projected 2005 earnings per share and 18 times projected 2006 earnings. Our StockScouter rated the stock a 4 on July 13.
Granite Construction (GVA, news, msgs). Eventually Congress will pass a highway construction bill -- it's stuck because the House and the Senate can't agree on funding -- and that'll put big bucks in Granite's order book.
Not that Granite, one of the largest heavy civil construction contractors in the U.S., has done too badly under the seven short-term extensions to the expiring highway construction legislation. With state tax collections picking up and higher gasoline revenue supplying more road construction funding, the company is on track for a 10% increase in earnings this year. The big bump for Granite comes next year when Wall Street is looking for almost 20% growth in earnings.
The shares now trade for 20.4 times projected 2005 earnings per share and 17.2 times projected 2006 earnings. Our StockScouter rated the stock an 8 on July 13.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He doesn't own short positions in any stock mentioned in this column.
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