One of the running gags of the Donald Trump era was how infrastructure stocks should look forward to Infrastructure Week.
The idea was that the administration would spend an entire week boosting investment in roads, dams, broadband networks, water systems, and other types of big infrastructure.
Infrastructure Week never happened because the news got in the way. The administration’s attention constantly shifted. This should have been expected. It became a joke among the press corps.
But infrastructure is more important than ever. The regulated utilities of a century ago — the water, electrical and communications networks that define American cities — do need updating. Roads and sewers built during that time need rebuilding if growth is to accelerate.
So, with the change of administration, I held my own Infrastructure Week. I identified six companies specializing in infrastructure of one type or another. I did a deep dive on each of these infrastructure stocks. With investors aging every day, do any of these companies deliver the income, and opportunity for growth, that might lead to a happy retirement?
I made some surprising discoveries. There are some great investments out there for people who want to bet on infrastructure stocks. There are also some whose rise I can’t fathom. See if you can tell the difference.
Happy Infrastructure Week, everybody! Here are six infrastructure stocks to know.
- American Water Works (NYSE:AWK)
- American Tower (NYSE:AMT)
- KBR (NYSE:KBR)
- Caterpillar (NYSE:CAT)
- Switchback Energy (NYSE:SBE)
- Granite Construction (NYSE:GVA)
Infrastructure Stocks: American Water Works (AWK)
American Water Works is the most valuable company in Camden, NJ. It has twice the market capitalization of better-known Campbell Soup (NYSE:CPB). The company runs water utilities in 16 states with 3.4 million customers.
It’s a good business. Growth has continued during the pandemic, hitting nearly 16% year-over-year for the September quarter. Almost one quarter of that revenue, $264 million out of $1.08 billion, hit the net income line.
The balance sheet shows almost $9.6 billion of long-term debt, beyond capitalized leases. The company raised $500 million to deal with the pandemic, but the cash was still on the books in September. The company had capital investments of $1.85 billion over the last 12 months. AWK stock gained about 25% in 2020. This made it the top-performing utility stock.
American Water also runs plants for the Department of Defense in 14 states. Its most recent military deal, for Joint Base Lewis-McChord in Washington, brings in less than $15.4 million per year, but runs for 50 years.
American Water Works’ bonds generally sell at a premium, although they briefly touched 100 at the height of the pandemic. If you got in then, you’re sitting on a fat profit.
But it’s easier to just pick up the stock, which is up 22% over the last year and has delivered $2.15 per share in dividends. The yield looks low, 1.4%, only because the capital gains have been huge. Shares are up 155% over the last five years. If you got in back then, with shares at $65, you have a current yield of 3.3%.
For a conservative investor, American Water Works is a long-term winner. It has delivered total returns, including dividends, of 186% over the last five years. Retirees who get into American Water can put their feet up.
American Tower (AMT)
While big telecommunications stocks like AT&T (NYSE:T), Verizon Communications (NYSE:VZ) and T-Mobile (NASDAQ:TMUS) remain bargains because of their debt levels, their landlord, American Tower, is trading like an internet stock.
Shares were due to open Jan. 26 at about $227.50 each. That’s a market cap of $101 billion on estimated 2020 revenue of $7.8 billion. The reason? AMT has been taking over 20% of its revenue to the net income line and handing it back to shareholders. Over the last five years, its dividend has more than doubled — and so has the stock price.
Low interest rates power AMT’s growth. Over the last six months, for instance, American Tower has priced two debt issues, one for $2 billion, one for $1.75 billion. The $2 billion issue went off at prices from 1.3% to 3.1% — the latter is a 30-year note. The $1.75 billion came even cheaper, with $500 million of it, due in 2024, carrying a coupon of just 0.6%.
American Tower is growing on that debt. In November it signed a deal to buy InSite Management Group, which manages about 3,000 sites, for $3.5 billion. Then on Jan. 14, it announced a $9.4 billion deal to buy Telxius Towers, which has 31,000 towers, from Spain’s Telefonica S.A. (OTCMKTS:TEFOF). The latter deal came with a $500 million commitment to build out 3,300 more sites in Germany and Brazil.
The deals highlighted the risks of owning American Tower. If the lending window shuts, they have trouble. Over the last six months, as the interest cost of the U.S. 10-year note has nearly doubled from 0.59% to 1.09%, American Tower stock has sunk 14%.
For now, AMT’s growth makes the stock a better bargain. You would have paid $272 per share for it on July 29, its all-time high. Today you can get it for about $227.
If you buy it, you’re betting that AMT can manage its towers and continue to draw premium rent for them, thus growing the dividend. The most recent dividend, announced in December, was $1.21 per share. The previous dividend, announced in September, was $1.14 per share.
As a real estate investment trust (REIT), AMT is more like Equinix (NASDAQ:EQIX), which leases cloud data centers, than it is like Simon Property Group (NYSE:SPG), which leases shopping centers.
KBR (KBR)
Nothing exemplifies the evolution of the economy, from energy to technology, better than the story of KBR.
KBR originally stood for Kellogg, Brown & Root, names to conjure with in the 20th century energy industry. During the 1950s, Brown & Root was the contractor to call in the oilfields. The Browns were one of the great entrepreneurial stories of the mid-20th century.
In 2020, KBR exited the fixed-price energy construction business. The new KBR will focus on government services and technology. Energy services contracts, including LNG terminals, had been 75% of the company’s business as recently as 2015. KBR had been spun out of Halliburton (NYSE:HAL), the oil field services giant, in 2007.
KBR followed its energy announcement up by buying Centauri, a military technology contractor, for $800 million.
CEO Stuart Bradie, a Scot, began the move out of energy when that business was at its peak, after a long career in it. He grew KBR’s government services unit through successive acquisitions, like Honeywell’s (NYSE:HON) technology services business.
Now, Bradie says KBR has achieved carbon neutrality and plans to be net-zero in carbon by 2030. Bradie’s board is one-third women. Achievement of Environmental, Social and Governance (ESG) goals is now part of its executive compensation.
None of this will matter if Bradie can’t do this at a profit.
In his third-quarter report, Bradie noted $269 million in operating cash flow through September, margins of 9%, and increased cash and earnings guidance for the full year. He dubbed the Centauri acquisition “highly strategic.”
Bradie has turned an energy engineering firm into a technology services business, in the middle of Houston, against a backdrop of slowly falling energy prices. The company today is fully valued, maybe a little overvalued based on cash flow. But it’s worth waiting for Bradie’s next trick.
Caterpillar (CAT)
Caterpillar makes big trucks, excavators, and other industrial machines. Inflation makes the things its machines move more valuable, so companies buy more CAT machines. That’s how it’s supposed to work.
Sure enough, just since the start of 2021, CAT is up almost 3%, and tat’s down from its peak. Over the last six months, CAT investors have nearly doubled the average S&P stock’s gains. They’re up 36% against a 25% gain in the S&P 500 stock average.
This is not yet reflected in the company’s business. During the third quarter Caterpillar saw earnings of just $1.22 per share on sales of $9.9 billion. The comparable figures for 2019 were $2.66 per share and $12.8 billion. Caterpillar next reports January 29, with earnings of $1.45 per share and revenue of $11.18 billion being the numbers to beat.
Despite the pandemic, Caterpillar’s quarterly dividend of $1.03 per share was maintained. That’s a yield of about 2.1%. If that sounds skimpy the dividend was just 77 cents five years ago. A rising dividend and rising stock price compensate for a low yield. Over five years, CAT is up 224%. That’s better than Facebook (NASDAQ:FB).
Investors who stayed with Caterpillar through the pandemic have prospered. Barron’s writer Al Root says they will prosper even more this year. Caterpillar shares have been part of the the early year rally but the average analyst also isn’t out ahead of their skis. Tipranks has CAT as just a moderate buy, with six analysts saying buy it, six saying hold and one saying sell. Their average one-year price target of $195 would mean a gain of just 4%. Analysts expect the global economy to pick up steam, as China’s did after its lockdown ended.
For those in retirement, or nearing it, Caterpillar offers a dividend as well as capital gains. It’s one of those stocks you should look to accumulate starting at age 55, and then stay in.
Right now, this infrastructure stock looks expensive. The short-term optimism looks overdone. But if you’re willing to let time work for you, there’s never a bad time to own a good company.
Switchback Energy (SBE)
Switchback Energy, which will trade as ChargePoint starting next month, is said to be the unquestioned leader in electric vehicle charging.
Is it?
As the deal to merge its special purpose acquisition company (SPAC) with the Campbell, California based ChargePoint approaches fruition, that is what investors are being told. ChargePoint has the largest independent network of charging stations. It has first-mover advantage. The market will be worth $190 billion in 2030, and ChargePoint will have a huge piece of it.
ChargePoint does have a big network of charging stations. Many are free. But most are so-called “Level 2” stations. These use 240 Volt equipment to recharge a car overnight. They’re a convenience, a quick top-up if you’re having a meal. But they’re not a refill as a gas-powered car owner understands it.
ChargePoint does have a fast charger, called DC Fast. Out of 121,000 ChargePoint locations, just over 400 offer DC Fast service, branded as Express and ExpressPlus.
Tesla (NASDAQ:TSLA) SuperChargers already offer the equivalent of DC Fast service. It’s a proprietary network, but it can be made to work with other cars. Using a SuperCharger on a non-Tesla car requires an adapter.
There’s a complex dance to be danced if your car isn’t a Tesla. There are three different plugs for fast charging — CHAdeMO, CCS and Tesla. Then there are adapters, dongles and toll-free numbers to call to buy the juice. If, that is, you’re not in a Tesla.
The best way to recharge an electric car, even a Tesla, is still to do it at home. A Tesla Supercharger costs twice as much as you’ll pay for electricity at home. Superchargers make the cost of driving an electric close to what you will find with a gas-powered vehicle.
This means I take ChargePoint’s projections with a grain of salt. Tesla will be a competitor. So will Volkswagen (OTCMKTS:VWAGY), which has a network called Electrify America, as well as stations in Europe. The money came from the $2 billion penalty it paid American regulators over its “Dieselgate” emissions scandal.
I want my next car to be electric. Legacy car companies like General Motors (NYSE:GM) and Ford Motor (NYSE:F) are busy extracting profits from gas-powered vehicles to get in gear against start-ups like Lordstown Motors (NASDAQ:RIDE) and Fisker (NYSE:FSR).
But electric charging won’t be like gassing-up for a decade. There will be plenty of dips to buy in infrastructure stocks like this. Just saying you have a charging network is no guarantee you’ll win the race.
Granite Construction (GVA)
Over the last three months Granite Construction has been among the hottest stocks in the market, rising 61%. It opened for trade Jan. 26 at almost $33 per share. That’s a market cap of $1.5 billion for a company that booked $2.5 billion in revenue for the first nine months of 2019 and hasn’t even reported in 2020.
Granite Construction is a road builder and materials company based in Watsonville, California. It bills itself as “America’s Infrastructure Company,” and that’s one reason investors are buying it.
But there’s a problem.
In August, Granite said its 2017 results could no longer be relied upon. It had previously said this about its 2018 and 2019 numbers.
The problem lay in its Heavy Civil unit, joint ventures where Granite was a minority partner. The company had gone into big projects with deep-pocket partners and was accounting for revenue based on completion estimates from those partners. When Jigasha Desai became chief financial officer in 2019, he chose more conservative accounting.
You can date the jump in Granite stock precisely. It began Nov. 4, the day after the election, with Granite below $19 per share. The climb in January has been nearly vertical, since Georgia run-offs put the U.S. Senate into Democratic hands.
The expectation is for a flood of infrastructure construction, from which Granite would benefit. Some analysts are comparing Biden’s first year to Franklin Roosevelt’s, saying there’s bipartisan support for the kind of work Granite is doing. Most of the company’s work today is under state contracts. Much of the new work is expected to be federal.
But there’s a problem with this hope. Big projects are what got Granite into trouble. It bid on them with joint venture partners, took minority stakes, and accounting difficulties followed. The company is still doing such deals, evidenced by a recent $750 million military contract announced Jan. 4. Granite isn’t getting anywhere near $750 million. It has a partnership which is one of five winning bidders.
Just because a company bills itself as “America’s Infrastructure Company” doesn’t mean it’s solely in charge of America’s infrastructure. Maybe the stock can recover its 2018 peak, when it traded near $75. But I need more proof before I jump in. Hope is not a plan.
At the time of publication, Dana Blankenhorn owned shares in T.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
