A surge in government infrastructure funding and related private investment is providing a lift to the U.S. economy — and boosting the prospects of several of our recommendations, asserts Rich Moroney, editor of Upside.
Government spending on construction has shown double-digit growth throughout 2023, and total construction spending rose more than 3% in the first half of 2023. In the first four months of 2023, spending related to computer, electrical, and electronics manufacturing was nearly double its average pace from 2005 to 2022.
Several trends bode well for continued growth in infrastructure spending:
* The steady shift toward electrification and renewable energy. The Inflation Reduction Act (IRA) from 2022 is subsidizing U.S. companies to manufacture renewable-energy equipment and electric vehicles. For the 12 months ended July, U.S. companies had pledged to invest about $100 billion in clean energy.
* More companies are building factories in the U.S. to reduce their reliance on China. The CHIPS ACT, also from 2022, is incentivizing companies to increase domestic production of semiconductors. U.S. companies have announced roughly $150 billion in investments for U.S. semiconductor production in the past 12 months. Spurred by the CHIPS Act and IRA, manufacturing construction spending for clean energy and semiconductors has tripled from 2022 levels.
*Artificial intelligence requires greater processing power than conventional technology, creating the need for more infrastructure. The additional power to support AI requires more advanced semiconductors, bigger data centers, and new hardware cooling systems. Global spending on AI is forecasted to top $301 billion by 2026, says industry researcher IDC.
Reviewed below are five companies that appear well-positioned to benefit from rising infrastructure spending:
Comfort Systems USA (FIX) is heavily exposed to favorable trends in the construction market, which generated 80% of its sales in the first half of 2023. The company offers services like ventilation, plumbing, piping, and controls in 132 U.S. cities.
Its backlog jumped 49% to $4.19 billion in the June quarter, representing 89% of trailing 12-month sales. Management attributes the stronger backlog to growing demand from data centers, semiconductor facilities, food processing, and life sciences.
After soaring 60% this year, the stock trades at 27 times trailing earnings, 17% above its industry median. But analyst profit estimates are moving higher in the past 30 days, with the consensus projecting 43% growth this year and 15% growth in 2024. Comfort Systems, trading at 21 times expected 2024 earnings, is a Best Buy.
Eagle Materials (EXP) has grown both per-share profits and sales in each of the past 16 quarters — trends likely to continue through the end of 2023. Eagle says recent results have yet to benefit from the boost in government infrastructure spending. Eagle produces construction materials, such as cement, gypsum wallboard, and recycled paperboard.
In July, Eagle raised cement prices by double digits in about half of its markets. Cement demand is strong and should remain so for the next several years. Per-share profits are projected to rise 10% in fiscal 2024 ending March, 10% in fiscal 2025, and 19% in fiscal 2026 — and estimates are rising. The stock trades at 13.5 times estimated current-year earnings. Eagle Materials is rated Best Buy.
A specialty contractor, EMCOR Group (EME) provides electrical and mechanical services for the construction of facilities in the commercial, industrial, health-care, and utilities markets. It also offers general services to maintain these facilities.
For the June quarter, EMCOR’s project pipeline grew 28% to $8.29 billion, translating to 71% of trailing 12-month sales. EMCOR said that the emergence of artificial intelligence has created more demand for large data centers.
The stock has surged 52% this year, dragging down its Value score to 33. Analyst estimates are up sharply in the past 30 days, with the consensus projecting 37% profit growth on 12% higher sales. EMCOR is a Best Buy.
Sterling Infrastructure (STRL) performs work on infrastructure projects involving highways, bridges, airports, ports, light rail, wastewater, and storm-drainage systems. Additionally, its e-infrastructure business mostly focuses on data centers and e-commerce distribution centers.
For the June quarter, Sterling grew per-share profits 37% to $1.27, topping the three-analyst consensus by $0.35. Revenue rose 13% to $522 million. The backlog reached $1.74 billion at the end June, up 23% since December and now representing 96% of trailing 12-month sales.
With construction activity stronger than expected, Sterling raised its 2023 outlook, with midpoints calling for 32% higher earnings per share on revenue growth of 13%. Sterling is rated Best Buy.
Terex (TEX) produces aerial work platforms and custom machinery, often utilized in the construction, energy, and materials markets. Low dealer inventories and aging fleets are fueling strong demand for aerial lifts and work platforms.
In August, Terex raised its full-year outlook for per-share profits, revenue, and free cash flow. The stock has rallied 38% this year yet trades at just eight times estimated 2023 earnings. Terex is a Best Buy.
