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Another election, another rapid boom in infrastructure

2 December 2016 in Trading Ideas

What you need to know

-Trump’s plan to rebuild infrastructure isn’t a new political strategy, but it sure is big
-Construction stocks have boomed, but be prepared for gains to recede
-Trump’s infrastructure financing plan faces significant political obstacles

A new administration always has big plans

Stop us if you’ve read this before: “With President-elect… pledging to rebuild the economy from the inside out, infrastructure companies stand to reap a substantial bonanza.”

Investors may remember reading this from a 2008 CNBC report, when President-elect Barack Obama pushed a $787 billion stimulus measure to rebuild the nation’s near-shattered economy, beginning with its crumbling roads and bridges. [1]

The Obama plan was good for a short-term boost among construction and engineering stocks in the wake of his election. Equities such as Caterpillar Inc. (CAT), a heavy equipment manufacturer, and Vulcan Materials Co. (VMC), a producer of construction materials such as sand, gravel and concrete, soared as much as 20 percent between Obama’s victory in November 2008 and January 2009, before coming back to earth once actual legislation had been signed.[2]

And while many infrastructure stocks are enjoying a nice rally now, it’s important for investors to note that not all of the optimism surrounding a potential infrastructure plan put forward by President-elect Donald Trump has been priced into construction, engineering and materials securities. Analysts and reporters are still digging into what is very much a large moving target.

But it’s a very large moving target, which makes it so appealing to investors. There’s no shortage of projects for the industry to tackle. The American Society of Civil Engineers estimates that it would take at least $3.6 trillion by 2020 to fully repair the nation’s infrastructure. [3] That figure doesn’t even take into account Trump’s $8 billion to $12 billion plan to completely seal off the U.S.-Mexico border with “a great, great wall on our southern border.”[4]

Cooperation between Congress and the White House trumps a great plan

While all presidents promise big plans, the Republican Party’s victory in the election – holding the senate and earning the White House – adds urgency and a sense of political possibility in achieving Trump’s infrastructure vision, which is goosing what are generally pretty stable equity prices. “We’re going to rebuild our infrastructure, which will become, by the way, second to none,” Trump said after his surprise election victory over former Secretary of State Hillary Clinton. “And we will put millions of our people to work as we rebuild it.”[5]

Although plans are sketchy, the Republican vowed during the campaign that he would double the $275 billion in infrastructure spending proposed by Clinton. [6] By comparison, less than half of Obama’s stimulus package was spent on physical infrastructure; most of the legislation was directed at tax breaks and benefit extensions. [7] If Trump is able to deliver on his promise, his administration would be responsible for one of the largest public-works improvement programs in a century, rivaled only in scope by the projects spawned during the Great Depression.

Infrastructure-related stocks are on the move

Although several Wall Street fixtures had predicted carnage on Wall Street if Trump won the White House, the Republican victory immediately boosted several construction and engineering stocks. [8] Caterpillar closed up almost 8 percent on the day after the election with stock closing above $91 per share. Vulcan gained about 10 percent, closing at $131.55. Investors who held stock in Fluor Corp. (FLR), the Irving, Texas-based construction and engineering giant, gained more than 10 percent on the day after the election.

Construction materials stocks did well, too. Martin Marietta Materials (MLM), a leading supplier of construction materials for roads and sidewalks, saw its stock rise more than 11 percent to close above $225 per share in the wake of the election. U.S. Concrete (USCR), already a partner in the $4 billion rebuilding of New York City’s dilapidated LaGuardia Airport, climbed almost 11 percent to close above $54.[9] And while stock in Cemex (CX) has remained more or less flat, the Mexican company has been named as a possible provider of concrete for Trump’s proposed border wall.[10]

“As ludicrous as The Trump Wall project sounds (to us at least), it represents a huge opportunity for those companies involved in its construction,” analysts wrote in a July research report for Alliance Bernstein (AB), a New York-based asset management firm. “If The Wall does go ahead, it will almost certainly be built from concrete. What is less clear at this stage is whether U.S. or Mexico-based suppliers will benefit.”

An anticipated boost in infrastructure spending also has helped investors holding equities in basic materials used in big projects, such as copper and steel. U.S. Steel (X), which has been upgraded in the wake of the election by several investment banks, soared 17 percent on the day after the vote, closing at $24.56. Its stock is currently trading above $29, a whopping 40 percent above its Election Day price.

Talk is cheap

Some of the euphoria surrounding infrastructure-related stocks has been tempered since the election. Experienced investors recall that most gains from infrastructure stocks vanished completely between the time Obama was elected in November 2008 and when he signed the stimulus bill three months later. [11]
There’s also no small degree of concern about Trump’s plans to use tax credits to pay for a massive infrastructure upgrade. While some projects such as sewage plants and toll roads may generate revenue that attracts investors, most public works aren’t expected to produce a continuing income stream.

The Trump plan also is likely to require cooperation from the Republican-controlled Congress. Trump’s plan depends upon the willingness of companies to repatriate earnings that are kept in overseas accounts to avoid higher U.S. taxes. The earnings would be taxed at 10 percent when they’re brought back to the U.S.; Trump’s plan would offer a credit for investment in infrastructure projects, offsetting the repatriation tax.[12]

“The real need is straight-up funding, not additional financing tools,” Bud Wright, director of the Washington, D.C.-based American Association of State Highway and Transportation Officials, told the Wall Street Journal. “These are sort of formulaic numbers that you could come up with to present something that looks like a plan.”[13]

Motifs to explore from this article

-Transporting America
-Smart Grid
-Water Shortage

[1] Cox, Jeff, “Obama’s Stimulus Proposal Lifts Infrastructure Stocks,” CNBC, December 8, 2008
[2] Gutierrez, Carl, “Wall Street Invests in Obama’s Plan,” Forbes, December 8, 2008
[3] American Society of Civil Engineers, “2013 Report Card for America’s Infrastructure”
[4] Valverde, Miriam, “How Trump plans to build, and pay for, a wall along the U.S.-Mexico border,” Politifact, July 26, 2016
[5] ABC News, “Full Text: Donald Trump’s 2016 Election Night Victory Speech,” November 8, 2016
[6] Rappeport, Alan, “Donald Trump Proposes to Double Hillary Clinton’s Spending on Infrastructure,” New York Times, August 2, 2016
[7] 111th Congress, “H.R. 1 – American Recovery and Reinvestment Act of 2009,” January 26, 2009
[8] La Monica, Paul, “Trump win is boost for infrastructure spending,” CNN Money, November 9, 2016
[9] U.S. Concrete Inc., “Form 8-K,” May 17, 2016
[10]Roseberg, Phil; Timpson, Nick; and Schlegel, Alexandra, “Bernstein Materials Blast: Who Would Profit from The Trump Wall?” AllianceBernstein, July 15, 2016
[11] The Economist, “False Expectations: The Historic Infrastructure Investment That Wasn’t,” October 21, 2010
[12] Trump, Donald, “Infrastructure”
[13] Harrison, David, “Donald Trump’s Infrastructure Plan Faces Speed Bumps,” Wall Street Journal, November 11, 2016