The globe is getting an upgrade. Governments around the world have pumped billions of dollars into their economies over the past two years to build and repair roads, bridges, power grids, water systems, and oil-and-gas pipelines worldwide.
And that’s only the beginning. CIBC World Markets expects nations to spend about $30 trillion on infrastructure over the next 20 years. They jump-started the spree with the stimulus packages crafted in reaction to the 2008 financial crisis. The numbers are huge -- the U.S. has pledged $150 billion for infrastructure; China, $586 billion; the European Union, $256 billion; and so on. That money is only slowly trickling down to the companies that will actually do the construction.
The “infrastructure” label covers a broad swath of companies. Standard & Poor's Global Infrastructure index, which breaks the category into three clusters -- energy, transportation and utilities -- has lagged during the current bull market. Between March 9, 2009, when the market bottomed and April 20, 2010, the infrastructure index advanced 74%, compared with an 83% gain for the S&P 500-stock index.
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We found four companies poised to capture significant amounts of this government largesse. Some are big contractors that have the scale to dominate rivals. Others are leaders in important areas that will need the most work in coming years, such as the power grid and water-filtration systems.
Many contractors were disappointed last year when stimulus-related packages did not materialize as soon as expected. Among the lot was Fluor (symbol FLR), a global powerhouse in energy infrastructure. As a result, the Irving, Tex., company reported fourth-quarter earnings that were shy of analysts’ estimates, and it lowered its forecasts for 2010. However, Broadpoint AmTech analyst Will Gabrielski believes orders for Fluor’s engineering services will begin to pick up starting in June. Moreover, the power segment, which accounted for only 6% of Fluor’s $22 billion in 2009 revenue, should thrive as the U.S. replaces aging coal plants with gas-fired and nuclear power plants over the next five years.
The stock, which closed at $52.36 on April 20, trades for 18 times the $2.97 per share that analysts expect the company to earn in 2010. The stock has gained 58% since March 2009, underperforming the S&P 500 by 20 percentage points. Gabrielski gives the shares a 12-month target price of $62.
The global power grid has seen better days. In the U.S., nearly half of the system's 2.2 million miles were built between 1948 and 1970, and the equipment that went into the system has a half-life of roughly 40 years. Meanwhile, developing countries need more power as they continue to industrialize.
Swiss power-equipment maker ABB (ABB) sits at the sweet spot of the massive grid upgrade. Simply put, it is the leading manufacturer of equipment that helps utilities save money by reducing energy losses between power plants and end-users. U.S. utilities alone are expected to spend $85 billion over the next 20 years to make the power grid more efficient. The power-transmission business accounted for more than half of ABB's $31 billion in sales in 2009.
ABB’s American depositary receipts have surged 101% since the market bottomed, but they appear reasonably priced. At $22.46, the stock trades at 19 times estimated 2010 earnings of $1.16 per ADR. That’s right at the ADR’s average price-earnings ratio for the past five years.
Smart metering is critical to a more efficient power grid. Itron (ITRI) is a leading maker of meters that measure energy usage in real time. Less than 10% of the 350 million meters in North America have that capability. The U.S. stimulus package provided $4.5 billion in grants for investment in a smart grid, and the money must be spent by 2013. Lazard Capital Markets analyst Sanjay Shrestha thinks Itron, based in Liberty Lake, Wash., is well positioned to win a significant share of those expenditures as utilities replace their meters over the next 18 months.
After the sugar rush of the stimulus ends, international sales will drive Itron’s growth, says Shrestha. The European Union will drive that trend as member states push to have 80% of their 145 million meters converted to smart meters by 2020. Itron’s stock, at $75.65, trades for 25 times the $2.98 per share analysts expect the company to earn this year. Shrestha recently upgraded the stock to “buy” from “hold” and sees the shares hitting $90 in 12 months.
Nalco Holding (NLC) is the big fish in the clean-water business. The Naperville, Ill., company commands 18% of the $6.5 billion market, more than any other player. Its water-treatment division generated $1.7 billion in 2009, 44% of the company’s total revenue. Plus, Nalco, which also provides chemical services to energy companies, beat analysts’ expectations in the fourth quarter of 2009. Canaccord Adams analyst John Quealy expects strong sales in Asia to help Nalco generate 4% revenue growth in 2010. He also notes that the company has made $100 million worth of cost-cutting measures, which will further boost the bottom line.
The stock, at $24.71, has soared 156% since March ’09 and trades at 18 times estimated 2010 earnings of $1.36 per share. Quealy thinks the shares could hit $33 in a year.
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