According to Patrick Tyler Brown, an investment bank Raymond James analyst, the U.S. federal government may deliver “a once-in-a-generation type infusion for infrastructure projects in [the] coming years.” Meanwhile, there are signs that billionaires and institutional investors are starting to pour money into infrastructure stocks ahead of the government’s likely, huge spending spree. Given these points, a variety of infrastructure names will likely surge in 2023, making this a good time for longer-term investors to find good infrastructure stocks to buy.
In addition to the infrastructure law, an imminent factory boom in the U.S., driven by the “onshoring” or “reshoring“ phenomenon and the transition to renewable energy and electric vehicles, should boost the financial results of many American infrastructure companies.
From a maker of plane engines to train operators, an internet service provider, and, of course, companies that help roads and bridges get built, this column will give investors a variety of top-notch, safe infrastructure stocks to consider.
Vulcan Materials (VMC)
We’ll start off with Vulcan Materials (NYSE:VMC), a company that will get a big lift from the most basic, common type of infrastructure projects: the repair and construction of roads and bridges. That’s because VMC is one of the largest providers of raw materials used in developing roads “and other public works,” including stone, sand, gravel, and concrete, in America.
And in a very good sign for Vulcan and VMC stock, billionaire investor George Soros last quarter bought 70,000 shares of VMC.
Additionally, since Vulcan’s materials are used “in the construction of ..commercial, industrial, and other nonresidential facilities,” the trend of semiconductor, electric-vehicle, and renewable energy factories being built in the U.S. aka “onshoring,” should help Vulcan.
In another positive development for VMC last quarter, institutions held or bought 115.9 million of its shares, while they only unloaded 5.7 million shares of VMC stock.
While the forward price-earnings ratio of VMC stock is a slightly elevated 24.7, analysts may be underestimating the extent to which the infrastructure law and “onshoring” will boost Vulcan’s results in 2023.
Union Pacific (UNP)
Union Pacific (NYSE:UNP) is one of the country’s largest freight train operators. On Dec. 20, CNBC contributor Jim Lebenthal theorized on the network that the “onshoring” trend would boost freight-train operators. That’s because freight trains will be used to carry the raw materials, which will be exploited to build the many factories that are being or will soon be developed in the U.S.
I agree with that theory. But I also believe that freight-train operators will get a major lift from ferrying around the country the raw materials used to build the projects paid for by the infrastructure law.
Also significant is the upgrade of UNP stock to “outperform” from “in line” by investment bank Evercore ISI on Dec. 20.
Evercore raised its rating on UNP to “outperform” from “in-line.” As reasons for the upgrade, the firm cited valuation and railroads’ ability to be “nimble” during challenging macroeconomic environments. Evercore raised its price target on the shares to $232 from $204.
Since BNSF Railway is a subsidiary of Warren Buffett’s company, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), instead of Berkshire owning a portion of its stock, many retail investors may forget that the Oracle of Omaha is in the freight train business. Buffett’s wholehearted endorsement of the sector suggests that it will perform well over the long term.
UNP’s forward price-earnings ratio is a reasonable 17.5, and it has a significant dividend yield of 2.5%.
Canadian Pacific (CP)
A Canada-based freight-railroad operator, Canadian Pacific (NYSE:CP), is in the midst of merging with one of its major American counterparts, Kansas City Southern. So CP, over the longer term, will also benefit from the infrastructure law and America’s factory boom.
But the Canadian train company has its own current, positive catalysts. Specifically, the company has been benefiting from solid fertilizer, wheat, automotive, and intermodal volumes. Last quarter, its overall revenue surged 19% year-over-year, and it expects to end the year with an operating margin of around 55%.
Also noteworthy is that Bill Ackman, a highly successful, multi-billionaire investor, last quarter significantly increased the number of shares of CP stock that he owns to 15.2 million from 2.94 million.
Overall in Q3, institutions bought or held 636 million shares of CP stock and sold only 47.5 million shares.
General Electric (GE)
Aircraft, like trains, are an important component of infrastructure revitalization. Therefore, I’m including GE (NYSE:GE), whose biggest business is making plane engines, on this list of infrastructure stocks to buy.
According to one study carried out by SkyQuest Technology Consulting, the global aircraft market is going to grow at a robust average compound annual growth rate of 10.9% between 2021 and 2028.”
SkyQuest explains that “Aircraft engines are in high demand due to the growing popularity of air travel. [And] airlines are expanding their fleets to keep up with the demand,”
Meanwhile, when GE’s joint ventures are factored into the equation, it’s the world’s largest aircraft maker.
On a different front, GE, which sells turbines that power natural gas plants and has a business focused on improving electrical grids, should benefit from the federal government’s upcoming investments in improving America’s electrical grid and preventing power outages.
In January, the Department of Energy kicked off its “Building a Better Grid” program with the goal of creating “new and upgraded high-capacity electric transmission lines.” The department is also looking to “support the buildout of long-distance, high voltage transmission facilities,” and it plans to spend over $20 billion on the initiative.
Caterpillar (NYSE:CAT) makes equipment, such as pavers and backhoes, used in construction. As a result, the company should get a big lift from both Washington’s infrastructure initiative and America’s factory boom.
Moreover, CAT gets a significant percentage of its revenue from selling equipment to oil and natural gas explorers, which, as you might have heard, has been doing quite well. Finally, the firm has a significant farm equipment business, and the farm sector, which is being boosted by elevated food prices, is also doing quite well.
Unsurprisingly, CAT reported very strong third-quarter results, as its top line jumped 21% year-over-year to $15 billion, and its Q3 earnings per share, excluding certain items, came in at $3.87, versus $2.60 during the same period a year earlier. Despite the impact of high inflation, the firm’s operating profit margin climbed to 16.2% last quarter, up from 13.4% in Q3 of 2021.
The Street appears to be warming to Caterpillar, as the stock has jumped 46% over the last three months.
Yet the shares still have an attractive price-earnings ratio of 17 times, and they also offer a significant dividend yield of 2%.
As I noted in a November 2021 column on AT&T (NYSE:T), the company is now focusing on its internet broadband and mobility (i.e., providing smartphone service ) businesses.
Further, the infrastructure bill will provide $65 billion to bring broadband internet coverage to the parts of the country that don’t already have it.
I believe that AT&T’s recent decision to partner with BlackRock (NYSE:BLK) on the launch of a “commercial fiber network…outside of AT&T’s traditional..service” area represents an attempt by the telecom giant to prepare to compete for some of the dollars that Washington will spend on expanding broadband coverage. Indeed, the firm stated that the initiative would seek “to bridge the digital divide,” i.e., seek to bring broadband to those who don’t already have it. Not coincidentally, that’s the same goal that Washington is pursuing.
Meanwhile, I’ve heard many other commentators note that the mobility businesses of AT&T and Verizon (NYSE:VZ) should be resilient to macroeconomic challenges since most consumers are very reluctant to part with their smartphones at this point.
T stock has a low trailing price-earnings ratio of 7.6 times and a high dividend yield of 6.1%.
Eaton Corporation (ETN)
Like General Electric, Eaton (NYSE:ETN) is well-positioned to benefit from the federal government’s upcoming spending on the electric grid and the boom of the commercial aircraft sector.
That’s because Eaton specializes in developing “electric components” and “power distribution” systems, along with “power reliability equipment and services,” while its Aerospace unit provides many components of commercial airplanes.
Impressively, last quarter, Eaton’s Electrical sector backlog soared 75% year-over-year, and its free cash flow jumped 36% YOY. The company’s earnings per share, excluding certain items, gained 15% YOY to a record $2.02.
ETN expects its electrical business to benefit from “reshoring,” and the company anticipates providing “electrical infrastructure” to support the renewable-energy boom. Moreover, Eaton expects to get a lift from the proliferation of electric vehicles and the increased need to ensure the resiliency of electrical grids in the face of climate change.
Despite its strong Q3 results and powerful upcoming catalysts, ETN stock has a reasonable forward price-earnings ratio of 19 times.
On the date of publication, Larry Ramer held a long position in GE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.