The boom in US infrastructure
America is finally upgrading its fixtures and fittings, says David J. Stevenson. That spells opportunity for investors
The next US presidential election takes place on 5 November 2024 – and the Democrats have already scored one big win. Prior to last year’s mid-term elections, they controlled the presidency and both Houses of Congress. Governments love lifting their spending in pre-election years.
Holding the country’s purse strings meant that the Democrats have been able to boost their presidential candidate’s election chances by splashing out cash provided by US taxpayers (and by Treasury bondholders, the funders of the country’s national debt) on a range of new building projects.
One of the main mechanisms here has been the Infrastructure Investment and Jobs Act (IIJA), aimed at upgrading roads, bridges and transit systems. This was signed off in November 2021 by president Joe Biden, whose message to the people was: “America is moving again, and your life is going to change for the better.”
Political rhetoric notwithstanding, there is no doubt about the need for improvement. Since the 1960s, when most of the country’s major infrastructure systems were built, the US population has more than doubled. Many of these structures are becoming dangerously overstretched.
“Civil engineers [have warned] that many bridges are structurally deficient and that antiquated drinking water and wastewater systems pose risks to public health,” noted the Council on Foreign Relations (CFR) think tank in November 2021. “The US lags behind other developed countries in infrastructure spending.”
The cost of clogged-up roads
Delays caused by traffic congestion cost the US economy more than $120bn a year, says engineer and historian Henry Petroski. He also highlights the damage to productivity caused by bridge collapses and dam breaches, as well as by badly maintained roads, railways and waterways.
Since the 1980s, the American Society of Civil Engineers (ASCE) has compiled regular “report cards” on the condition of US infrastructure. While recent years have seen some progress, the ASCE’s 2021 report still only deems it worth a C-. It also predicted that the current decade is set to see an “infrastructure investment gap” of almost $2.6trn. If left unaddressed, this could cost the US $10trn in lost GDP by 2039. US GDP totalled $23trn in 2021.
Between the IIJA and the Inflation Reduction Act (IRA), Congress has now allocated an eye-watering $1.25trn across the transportation, energy, water resources and broadband sectors for the next five to ten years. This legislation has funded about 20,000 endeavours so far. “There are projects coming out of the ground as we speak,” former New Orleans mayor and project co-ordinator Mitch Landrieu tells NBC news. “Almost every physical project you see… has a federal dollar in it. Some will take a little bit more time, but… we’re rebuilding the entire country.”
Of course, we’ve heard such talk before. But Landrieu reckons that Americans will clearly see the programme’s benefits by the next election. “US construction started 2023 on the right foot”, says We
Build Value magazine. A report by data provider Dodge “shows a 27% increase in new starts in December 2022, the first rise since 2017… [thanks chiefly] to the start of construction of large projects. Another boost came [in] January from the White House’s Mega Grant (National Infrastructure Project Assistance) assigning $1.2bn to nine projects.”
So is it too late for investors to get involved? In fact, the story is only in its early stages. While this is an “historic amount of money”, says The Brookings Institution, a Washington-based public policy organisation, “the bulk of it is still sitting in federal coffers.” Granted, spending the cash may not be as simple as politicians expect. Construction-sector prices are rising. The US labour market is tight, making it harder to recruit workers for major building projects. Debt-servicing costs are climbing as interest rates rise, squeezing budgets. And any fall in state or local government revenues could also curb projects. Still, the spending plans are so large they are bound to have a major impact on upgrading US fixtures and fittings.
“The US population has doubled since the 1960s, when most infrastructure systems were built”
Don’t fret about debt
What about the debt ceiling spat, though? US tax revenues are woefully inadequate to pay the country’s bills. The shortfall has to come from ever-increasing sales of Treasury bonds. In turn, Congress has regularly lifted the debt limit (the maximum amount that the US federal government can borrow to fund its spending).
Following last year’s mid-term elections, however, the Republicans gained a majority in the House of Representatives. Reaching consensus on lifting the debt ceiling has thus become tougher. House Republicans have refused to agree to it without promises of spending
cuts. This is “forcing the Treasury to take so-called extraordinary measures to keep paying its bills”, notes CNBC. “The non-partisan Congressional Budget Office (CBO) estimated the administration will exhaust its emergency tools this summer, raising the prospect of a default unless lawmakers raise or suspend the ceiling.”
That would be the country’s first-ever debt default. However, Congress has lifted the debt ceiling 78 times since 1960. It is probable that a compromise will be reached this time too, meaning that the US infrastructure programme is unlikely to be curtailed by borrowing constraints.
Could a deteriorating economy derail the infrastructure spree? The latest Institute for Supply Management (ISM) manufacturing index, a key production measure, “is very much in recessionary territory”, says Andrew Hunter at Capital Economics. He notes that there has been “only one previous occasion over the past 60 years where the index has fallen to that level without an economic contraction following .... Banking sector turmoil... has only strengthened our belief that domestic demand growth is set to weaken sharply”. Expect “the wider economy to follow the manufacturing sector into recession”.
More bang for a buck
Note also that the last two weeks of March saw US bank lending contract at the fastest pace on record. Yet while America’s finances are set to encounter increasing pressure, there’s a flipside that actually makes higher infrastructure spending even more likely.
Infrastructure provides large top-down benefits to the economy. There is a major multiplier effect: the economic gains are much greater than the money spent.
A 2014 study by the University of Maryland calculated that for every $1 spent on infrastructure investments, as much as $3 is added to GDP growth. The latter benefits even more in recessions. Morgan Stanley predicts that a $1trn decade-long package could add 0.2% to GDP annually and create 715,000 jobs over ten years. “Add to this the potential boost from fiscal stimulus and it could add as much as 0.4% to 0.8% to annual GDP growth rates,” according to Ellen Zentner, Morgan Stanley’s chief US economist.
So which areas will do best from higher US infrastructure spending? “Energy is the IRA’s biggest beneficiary,” says Brookings. “We estimate energyfocused programmes will receive $276bn over ten years. The IRA intends to… invest across the entire value chain, including construction of clean-energy facilities ($114.5bn), generation of clean electricity and research into cleaner fuels ($105.5bn), and incentivising more energy efficiency through building retrofits ($51.4bn).”
In summary, then, American infrastructure provision offers investors major opportunities. “With so much money available across so many programmes, strategic implementation is now the most urgent priority”, says Brookings. However, “when it comes to infrastructure, the era of big government isn’t over – it’s just getting started”.
What to buy now
Few prospectors made money panning for gold in the mid-19th century Californian gold rush, but picks-and-shovels suppliers flourished. It is likely to be a similar story with US infrastructure spending: buy shares in the makers of the machines doing the hard work.
Terex (NYSE: TEX) is a global manufacturer of materials-processing machinery and aerial work platforms. This $2.9bn company designs, builds and services a range of products employed in construction, maintenance, manufacturing, energy, recycling, minerals and materials management.
In 2022, Terex’s sales climbed by 14% to $4.4bn, income from operations increased by 28% to $420m and earnings per share (EPS) surged 41% to $4.32. The order backlog jumped by 22%. Net debt on 31 December 2022 was $471m, down from $595m three months earlier. The annual dividend was hiked by 10%.
For 2023, Terex is forecasting sales between $4.6bn and $4.8bn, with EPS between $4.60 and $5.
The stock is on a price/earnings (p/e) ratio of 8.7, with the multiple expected to drop to eight next year and just 7.7 in 2025. Yet recent equity-market weakness has contributed to a near-30% share price fall since early March. Terex is a cheap stock with good growth potential.
Consider also Herc Holdings (NYSE: HRI).
Worth $3bn, it is now one of the leading US equipment rental suppliers, with 356 locations in North America. The company’s fleet includes aerial, earthmoving and material-handling equipment, trucks and trailers, air compressors, and compaction and lighting.
Last year’s equipment-rental revenue increased by 34% to a record $2.55bn. Adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) rose by 37% to $1.23bn – another record – while net income rose by 47% to $330m, equivalent to EPS of $10.92. Admittedly, net debt was up $1bn but that was largely due to the fleet being renewed. A fourth-quarter dividend hike puts the yield at 2.3%.
For 2023, Herc expects adjusted Ebitda growth of 18% to 26%. The shares are on a p/e of 7.2, dipping to 6.7 next year and 6.1 in 2025. Yet the stock has almost halved since November 2021. This is another excellent buying opportunity for another cheap stock with ample scope for growth.
“For every $1 spent on infrastructure, as much as $3 is added to GDP growth”