5 Industries That Stand to Gain From Biden's Jobs Plan
But while increased infrastructure spending will create opportunity, the market has already priced in most of these companies' potential.
Though the bill likely won't be finalized until summer, the American Jobs Plan is expected to provide more than $2 trillion to traditional and nontraditional infrastructure programs. We outlined the elements and impact of the plan in "Which Stocks Benefit from Biden's Jobs Plan?"
We expect traditional infrastructure, which includes roads, transportation, and other shared public facilities, to constitute approximately one third of the spending package. In context, this equates to about 3 times the annual run rate of spending conducted through the Highway Trust Fund. These programs include:
Many traditional infrastructure companies are already fairly valued or overvalued, but the stocks that will benefit the most will mostly be found in the basic-materials and industrials sectors. In addition, specialized subsectors such as engineering and construction and project management software will see greater demand.
Of these companies, those that stand to realize the greatest valuation impact will be in the small- to mid-cap categories, as the benefit to diversified, large-cap companies may be diluted by their other business lines. In addition, we expect that we will see the preponderance of earnings growth concentrated in the value category, which contains the cyclical and most economically sensitive corporations.
We are confident that companies providing cement, concrete, and construction aggregates will benefit from greater infrastructure spending. Of those companies, we cover Martin Marietta (MLM), Summit Materials (SUM), U.S. Concrete (USCR), and Vulcan Materials (VMC).
In our base case, we have already incorporated our expectations for the heightened spending from the infrastructure plan. Even after incorporating the impact of this spending into our models and forecasting total EBITDA growth of up to 80% over our five-year projection period, we think that Martin Marietta, Summit, and Vulcan are already overvalued with Morningstar Ratings of 2 stars. We think U.S. Concrete is fairly valued at 3 stars.
Companies like Caterpillar (CAT) and Deere (DE) that provide the heavy equipment needed to support infrastructure improvement will benefit from the higher activity levels. However, similar to the aggregates manufacturers, on a probability-weighted basis we have already incorporated the higher demand into our projections for these two companies.
Once the infrastructure plan is enacted and additional information is provided, there is a strong likelihood that we may further increase our projections. However, we estimate that any additional revenue would only move our fair value estimates incrementally from current levels.
In addition to the first-order effects, a wide range of industrials will realize additional demand from the traditional infrastructure spending as well as several other nontraditional initiatives within this framework. For example, about 30% of JBT's (JBT) revenue is from airport equipment, including jetways, as well as cargo loading, aircraft deicing, aircraft towing, and aircraft ground power and cooling systems. To an extent, Honeywell (HON) will be a secondary beneficiary through its investments in airports as well as its building technologies segment, which will be active in multiple infrastructure initiatives.
Other industrials that may see an uptick in traditional as well as nontraditional infrastructure spending include Eaton (ETN) and Hubbell (HUBB). Both of these firms provide equipment to electrical transmission systems in order to make the grid harder (more robust and resistant to power outages) and smarter. To a lesser extent, General Electric (GE) and Emerson (EMR) may also benefit in this area. GE sells transmission solutions, although this is a smaller part of the company's overall mix, and Emerson recently acquired a business that provides advanced distribution management software for transmission and distribution.
Transportation will also come into play when all this raw material and equipment needs to be delivered to the project sites from suppliers and manufacturers. Additional transportation resources may be required from railroads and trucking companies to move all the material and machinery around.
But, in our view, investors have already overextrapolated the impact from the resurgence in the U.S. economy this year and next and pushed these stock prices too high above their intrinsic valuations.
Finally, to organize all this work, most of these projects will require experienced engineering and construction firms that specialize in large-scale projects, such as Fluor (FLR), Jacobs Engineering (J), and Aecom (ACM). As these engineering firms plan the infrastructure projects, they may need to expand their relationships with firms that provide computer-aided design and simulation software, including Ansys (ANSS), Autodesk (ADSK), and Dassault Systemes (DASTY).
Though some investment opportunity remains in the traditional infrastructure space, we think that, for the most part, the market has already baked in the potential impact of the American Jobs Plan.
The best bets for investors lie in companies that are considered nontraditional infrastructure. Those companies are covered in depth in our next article.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.