The infrastructure transaction is smaller than many desire, but according to investors in the sector, it will still make an impact.
President Joe Biden has agreed a “hard” infrastructure package that will include $579 billion in additional investment in road building, waterway, electricity and Internet.
While considerably lower than the original, wider $2.2 trillion U.S. employment plan proposition, investors noted that it still represents a substantial down payment on US infrastructure reconstruction.
“It’s not really a slimmed-down bill; it’s just more focused,” said Jay Jacobs, head of research and strategies at Global X and manager of the Global X U.S. Infrastructure Development ETF (PAVE), a basket of U.S.-based companies that generate the majority of their revenue from infrastructure development. “This is the ‘hard infrastructure’ component of his plan, which addresses construction, transportation, and the electric grid. In this section of his proposal, Biden got the majority of what he wanted.”
(PAVE is up 4% this week, bringing its year-to-date gains to 21%.)
The agreed-upon sum “It is a significant sum of money for this sector of the economy,” Jacobs said.
How big is it? According to Jacobs, roughly 1.5 percent of GDP (about $300 billion per year) is spent on public construction each year, so $579 billion (spread out over several years) is more than enough to make a difference.
“This will benefit companies in steel, construction, engineering, and roadbuilding,” he said, as well as broadband expansion, which is popular among rural (Republican) constituents.
While most infrastructure stocks are down from their highs, there have been significant moves in those stocks this week:
Cranes and work platforms:
Terex has increased by 14%.
Manitowoc is up 9%.
Rental of equipment:
Herc Holdings has increased by 14%.
United Rentals has increased by 10%.
Deere’s stock is up 7%.
Services in the construction industry:
Summit Materials is up 13%.
MRC Global has increased by 9%.
Alcoa has increased by 14%.
Century Aluminum is up 13%.
Ryerson maintains a 9% market share.
The Cleveland Cliffs are up 8%.
Steel in the United States is up 7%.
Allegheny Technologies is up 7%.
Building a road:
Granite construction is up 11%.
Martin Marietta has increased by 7%.
Vulcan Materials increased by 7%.
Dycom Industries increased by 9%.
AECOM gains 7%
Jacobs Engineering has increased by 5%.
According to Jacobs, engineering firms are particularly well positioned to benefit from infrastructure development in the United States.
Jacobs Engineering, for example, generates 33% of total revenue from US government contracts, or 44% of total revenue in the US. CEO Steven Demetriou stated on the company’s second-quarter 2021 earnings call, “[A]s far as the U.S. infrastructure stimulus opportunity, I think we’re extremely well positioned with the organic capability we have today.”
A wise strategy?
Reaves Asset Management’s Jay Rhame, who specializes in infrastructure-related industries such as utilities, energy, and communications, believes Biden was wise to divide the American Jobs Plan’s infrastructure proposals into two parts: a “hard” infrastructure package and a “soft” infrastructure package.
“This is what Biden ran on: his ability to reach across the aisle and strike a deal,” he explained. “It wasn’t worth it to stall the hard infrastructure over softer infrastructure issues. Let’s get people back to work instead of getting caught up in a debate about carbon emissions.”
Other components that could be classified as “infrastructure” are also progressing. The Senate passed the United States Innovation and Competition Act two weeks ago, which would provide $252 billion in funding for scientific research, as well as subsidies for chipmakers and robot makers, in an effort to compete with China.
The following section, dubbed “soft infrastructure,” will address clean technology, elderly care, and funding for schools and hospitals. That will be far more contentious, and it is possible that Democrats will try to force it through the reconciliation process.
“That is going to be the next big fight,” Rhame predicted.
“The renewed engagement of governments, public/private enterprises and the general people in the fight against climate change Plus the need for a robust source of energy support future solar demand,” analyst Gail Nicholson wrote in a note.
Stephens has initiated coverage of five solar stocks, all of which are rated overweight:
First Solar has a price target of $102 per share (20.7 percent upside to Thursday closing price)
Enphase Energy has a price target of $215. (25.9 percent upside to Thursday closing price)
SolarEdge Technologies has a price target of $336. (25.7 percent upside to Thursday closing price)
Sunnova Energy has a price target of $56. (58.6 percent upside to Thursday closing price)
Sunrun — target price of $82 (55.2 percent upside to Thursday closing price)
Solar stocks outperformed the market in 2020, outperforming the S&P 500 by more than 275 percent from the March lows to the end of the year, according to Stephens. However, the Invesco Solar ETF is down 17.3 percent in 2021 as investors shift to value stocks.
“We believe the underperformance creates an appealing entry point for investors seeking ‘green’ growth,” Nicholson said.
According to Stephens, solar energy will grow at a rate of more than 15% per year for the next five years. The global capacity of installed photovoltaics, a type of solar energy, is expected to more than double by 2025, according to the firm.
The Biden administration’s decision to rejoin the Paris climate agreement and set a goal of achieving net-zero emissions by 2050 indicate a favorable regulatory environment for the solar sector, according to Nicholson.