Although the novel coronavirus continues to leave some doubts in investors minds, one sector that could see major benefit due to recent news are infrastructure stocks.
It’s being reported that the President Donald Trump’s administration is working on a $1.5 trillion infrastructure plan. The objective of the is to boost economic growth, and create jobs as the economy crawls back from the coronavirus-triggered recession.
With the infrastructure plan including education, broadband and housing, there are several attractive opportunities to consider. That said, we will discuss four infrastructure stocks that can benefit from the coming investment in the sector.
- Caterpillar (NYSE:CAT)
- American Tower Corporation (NYSE:AMT)
- Vulcan Materials (NYSE:VMC)
- Jacobs Engineering (NYSE:J)
So, with all of that in mind, let’s take a deeper look into these potential value creators.
Infrastructure Stocks to Buy: Caterpillar (CAT)
One of the business segments for Caterpillar is the construction and infrastructure business. For the first quarter of 2020, segment sales were $4.3 billion compared to $5.9 billion in Q1 2019. However, with the infrastructure spending plan for North America and Asia being the long-term growth driver, I am bullish on the construction segment.
Even in the energy and transportation segment, lower oil prices have impacted growth. And as oil gradually trends higher, there is visibility for higher investment in the energy sector in fiscal year 2021 — and the same holds true for the resources industry.
Overall, the worst in terms of sales and profitability is likely in Q2 2020 for Caterpillar. Subsequently, top line is likely to improve and CAT stock can trend higher.
It’s worth noting that CAT stock currently offers a forward dividend of $4.12. Dividends are sustainable and can potentially increase in the coming years. In turn, this makes the stock equally attractive for income investors.
Additionally, from a liquidity perspective, Caterpillar reported total cash of $6.25 billion during Q1 2020. That said, a strong liquidity profile will ensure that the company navigates the current headwinds with relative ease.
American Tower Corporation (AMT)
AMT stock, which currently trades somewhat near its 52-week highs, is another name to consider when it comes to infrastructure stocks.
As of Q1 2020, American Tower reported 180,000 communication sites globally. And with tower leasing being the revenue and cash flow growth trigger, the company is well-positioned to benefit from 5G growth in the coming years. Also, it’s worth noting that China has been outspending the United States on 5G infrastructure. So in the coming years, it’s nearly inevitable that infrastructure spending will ramp up in the United States in order to compete.
Furthermore, mobile penetration growth coupled with mobile data traffic growth is likely to benefit American Tower Corporation.
So, considering these growth triggers, it’s not surprising that analysts estimates point to robust earnings growth. On an annual basis, earnings are likely to grow at 14.7% in the next five years.
Besides the business growth potential, though, AMT stock is attractive for income investors. The REIT pays a forward dividend of $4.40, which is likely to increase in the coming years. Moreover, another reason to like the REIT is the fact that the company has a recurring long-term revenue stream. The contract terms are generally for five to ten years, which provides clear cash flow visibility.
Therefore, with all of this in mind, AMT stock is a great buy among infrastructure stocks.
Vulcan Materials (VMC)
Vulcan Materials is the largest producer of construction aggregates in the United States. And with potential investments in the infrastructure sector, the company stands to benefit.
A key reason to like Vulcan Materials is the relatively high barrier to entry in the industry. With limited competition and the requirement for composite aggregates across public and private projects, the outlook is bright.
Additionally, from a fundamental perspective, the company has a low leverage of 2.2 as of FY2019. It’s also worth noting that in the last six years, the company’s adjusted EBITDA has grown at a constant annual growth rate (CAGR) of 19%. In turn, this translates into higher cash flows. Also, the company currently is paying a forward dividend of $1.36 per share, which is sustainable.
Collectively, though, VMC stock has declined by 16.3% in the last six months. However, once the infrastructure spending plan is rolled-out, I expect the stock to be an outperformer. That said, the current weakness therefore provides a good accumulation opportunity for investors.
Jacobs Engineering (J)
Jacobs Engineering is a provider of consulting, technical, scientific and project delivery services for sectors like infrastructure, water and renewables.
In challenging economic conditions, a key reason to like Jacobs Engineering is the fact that the company has an order backlog of $23.3 billion as of March 2020. This provides the company with clear revenue and cash flow visibility as that figure falls. Furthermore, the company believes that for the current year and the next year, the new business pipeline is at $37 billion. In turn, this will ensure that healthy cash flows sustain in the coming years.
It’s also worth noting that the company’s business is focused in the United States. However, the company is gradually making inroads in international markets. That said, this will provide scope for growth with a larger addressable market.
From a valuation perspective, J stock currently trades at a price-earnings-ratio of 14. This is attractive considering the growth potential. J stock has also been in a consolidation mode, with the stock trending higher by less than 1% in the past year. With that in mind, a break-out rally is likely once the current economic headwinds are navigated.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.