Given the magnitude of the decline in our capital markets and the chaos that has ensued among our regulators, it is not surprising that economists and market commentators are comparing the current financial imbroglio to the Great Depression.
For investors interested in wealth building ideas among the carnage, it might be prudent to investigate what actually benefited most as America pulled itself out of the Great Depression in the late 1930s.
Franklin Roosevelt assumed the presidency at the depth of the Great Depression. By March 1933, there were 13 million unemployed and almost every bank was closed. As part of his plan to get the economy back on track, Roosevelt pushed forward landmark legislation like the Workers Progress Administration (WPA), which put people to work building streets, highways, bridges and airfields.
Over its seven-year history, the WPA employed 8.5 million Americans and almost every community in America was affected by it with parks, bridges and schools constructed. Expenditures from 1936 to 1939 totaled nearly $7 billion, which in today’s dollars would be worth $109 billion.
Today, policymakers are again calling for infrastructure spending as a way to jump-start the economy. House Speaker Nancy Pelosi is on board. President-elect Barack Obama is also a fan, reportedly saying on the campaign trail, “We’re going to put 2 million more Americans to work, rebuilding our crumbling roads and schools and bridges.”
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Obama isn’t exaggerating: Those roads really are crumbling. According to the American Society of Civil Engineers (ASCE), 34% of major roads are in poor or mediocre condition; since 1998, the number of unsafe dams has risen by more than 33% to 3,500; 27% of bridges–more than one in four–are structurally deficient or functionally obsolete.
The new national call for infrastructure stimulus as a way to juice the economy has professional investors now wondering which companies could benefit. Longtime veterans on Wall Street think engineering and construction companies and materials firms could reap big rewards if there is a WPA replay.
The ASCE has put the price tag of overhauling our infrastructure system at $1.6 trillion. The required repairs leave investment pro Dennis Gartman feeling bullish on the old guard, basic “movers and makers of stuff.” In other words, things like stone, cement and steel.
Gartman writes, “This is a new WPA crying to be put into effect and it will be to the benefit of the unemployed here in the US and to the benefit of
Stefan Abrams of New York-based Bryden-Abrams Investment Management agrees.
“We are going to need to jump start a recovery,”Abrams says. “One of the best ways to create jobs, high-paying jobs, is to get to work on rebuilding the nation’s roads, bridges, dams and tunnels. It won’t do much good for the government to mail $600 checks to people. That’s a quick sugar fix that fades fast. But if the government finds ways to either fund or incentivize through tax policy the construction and repair of new infrastructure, then you create a lot of jobs, income and GDP.”
In fact, a U.S. Department of Transportation study concluded that for each $1 billion of federal spending on highway construction nationwide, 47,500 jobs are generated annually. If we invested in our infrastructure at the level of $1.6 trillion over five years, as many as 5 million jobs would be created.
We set up a stock screen to uncover companies that will benefit from an infrastructure spending spree. We came up with five strong companies, mostly engineering firms and materials firms. These companies are all cheap (current price to sales less than their five year averages and a price-to-earnings to growth ratio–PEG–of less than one), profitable, produce cash, sport solid balance sheets (debt to equity less than 50%) and are well-positioned for the long haul.
One company that popped up on our screen was engineering and construction contractor
Bulls on the stock are quick to point out its double-digit growth in backlog, which they say should drive strong revenue growth over the near term. (Fluor’s total backlog at year-end 2007 was over $30 billion, up 38% from a year earlier.) The company has a healthy balance sheet; looks very profitable with a Return on Equity of 33.35%; and it’s a bargain with a PEG of just 0.52.
Fluor has also been busy pleading its case on Capitol Hill. The company spent $983,099 to lobby the federal government in 2007 and has already spent $980,189 so far this year, according to disclosure forms posted by the Senate’s public records office.
Fluor’s political action committee hedged its bets, giving money this year to both sides of the aisle including $10,000 to the Democratic Congressional Campaign Committee and $15,000 to the Republican Congressional Campaign Committee. Fluor has lobbied on numerous issues, including trade, transportation projects and funding for nuclear facilities.
A second engineering and construction play: Houston, Texas-based
John Rogers, analyst at D.A. Davidson & Co., notes better than expected third-quarter earnings at STRL, backlog improvement ($511 million at the end of the quarter, up 39% year-over-year), and shares that at current levels are substantially undervalued.
STRL certainly looks cheap, with a price-to-earnings ratio (P/E) of 7.3 versus a five-year average of 13.1 and a PEG of 0.59.
“Currently, the company’s backlog extends well into 2009,”Rogers says. “Eventually, demand for the company’s construction services could benefit from a government fiscal stimulus program, as well as planned light-rail projects in Houston.” (In fact, the state of Texas recently approved more than $1.8 billion in additional spending on construction projects, which could be good news for STRL.)
Another engineering & construction company worth a look is
Steven Fisher, analyst at
In July, KBR completed its acquisition of BE&K, a privately held Alabama-based engineering, construction and maintenance service company. Analysts say that purchase should help supplement KBR’s domestic engineering portfolio and be accretive to top and bottom line results by the end of the year.
The stock of KBR is down 70% in the past 52 weeks, providing investors with an attractive entry point. Shares are now trading at just 5.8 times estimated EPS of $1.71 for the current year.
In addition to engineering and construction companies, there are materials firms that could benefit from government’s plans to put more emphasis on the national dilemma of weak, aging infrastructure. Dennis Gartman, for one, is putting money to work in steel and copper and, generally, “things that if dropped on our foot shall hurt.”
Concrete would certainly hurt. That’s one of the materials made by
Founded in 1907 in Los Angeles, Ameron International today is a multinational manufacturer of all kinds of highly-engineered products and materials. It’s a leading producer of fiberglass-composite pipe used for transporting oil; sells water transmission lines (particularly important in the Western U.S. to support population and business growth); manufactures wind towers for the energy market; and manufactures concrete, sand, and street-lights.
Investors don’t expect much of such a little materials maker in a slowdown, which is why they have aggressively sold the stock. The company in late September did report disappointing third-quarter earnings, due in part to softness in residential construction. Shares have slipped 70% in the past 12 months
But if Obama, Pelosi and the rest of the gang have their way and push through infrastructure spending as economic stimulus, expect this company to reap rewards. Bulls on Ameron point to its exceptional balance sheet and strong growth prospects, with the company well-positioned to benefit from continued investment in oil and gas infrastructure that drives demand for its fiberglass pipe, improvement in water transmission bid activity and new orders for wind towers.
Ameron is also cheap, with a current P/E of 6.4, versus a five-year average P/E of 15.7. Investors are now paying little for the company’s expected earnings power: The PEG is 0.60.
Of course, an infrastructure build-up will also require a lot of steel. Charlotte, N.C.-based
Research analysts covering Nucor point out that it enjoys some specific advantages over rivals. For example, the company has established itself as a low-cost provider. Its mini-mill operations produce steel from scraps and cost less in raw material and energy inputs versus the integrated steel mills, which take raw components of steel, like iron ore, and smelt them into steel.
Nucor’s emphasis on technological innovation has allowed it to improve overall operating efficiency and it has supplemented its internal growth with smart acquisitions.
“By keeping a healthy balance sheet in both good times and bad, Nucor has been able to acquire rival steel makers on the cheap during industry downturns,”says Morningstar analyst Min Ye, adding, “All in all, Nucor is one of the best companies in the steel universe.”
Nucor has a healthy balance sheet, substantial free cash flow and it’s dirt cheap with a PEG of just 0.54.
The company has also dedicated money to making new friends inside the Beltway. Nucor has spent $1.65 million so far in 2008 to lobby the federal government. Nucor lobbied on numerous issues, including trade subsidies and off shore drilling.