US infrastructure stocks to watch on Trump’s $1tn stimulus boost

US infrastructure stocks to watch on Trump’s $1tn stimulus boost by Michael McKenna
The Trump administration is considering a new $1trn infrastructure plan to boost economic growth and employment. This will the entire construction segment of the US economy and thus investors should consider getting exposure to construction related industries.

Last week’s rout in US equity markets was particular tough with US infrastructure related stocks down 9.6% but this week the group has staged a 3.4% comeback on the news that the Trump administration is preparing a $1trn infrastructure plan to boost the economy. It’s difficult to guess which stocks will do best under this infrastructure plan so instead we have created a basket of 30 US construction related stocks across different industries that could get a boost if not economically then certainly in terms of sentiment over the coming months.

Name Sector Industry Mkt. Cap. Return YTD (%) EV/EBITDA Net-debt-to-EBITDA Chg. Est. EPS 1m (%)
Johnson Controls International plc Industrials Building Products 25,819 -13.4 13.6 1.3 -0.2
Carrier Global Corp Industrials Building Products 18,406 N/A N/A N/A 0.3
Masco Corp Industrials Building Products 12,729 1.2 10.9 1.5 6.4
Lennox International Inc Industrials Building Products 8,608 -7.4 14.3 2.1 -0.1
Fortune Brands Home & Security Inc Industrials Building Products 8,629 -3.5 12.0 2.3 -0.3
A O Smith Corp Industrials Building Products 7,723 1.7 14.6 -0.3 1.9
Trex Co Inc Industrials Building Products 6,940 33.5 30.0 0.3 0.6
Owens Corning Industrials Building Products 6,016 -13.6 25.3 2.2 2.3
AZEK Co Inc/The Industrials Building Products 4,507 N/A N/A 6.0 N/A
Armstrong World Industries Inc Industrials Building Products 3,630 -18.9 10.1 0.8 -0.5
Simpson Manufacturing Co Inc Industrials Building Products 3,651 5.1 14.2 -0.5 0.0
Advanced Drainage Systems Inc Industrials Building Products 3,483 29.1 131.4 3.1 24.0
Jacobs Engineering Group Inc Industrials Construction & Engineering 11,077 -4.8 16.0 1.9 0.4
AECOM Industrials Construction & Engineering 6,227 -9.8 19.7 1.7 2.2
Quanta Services Inc Industrials Construction & Engineering 5,299 -5.6 7.4 1.6 -0.8
EMCOR Group Inc Industrials Construction & Engineering 3,426 -27.4 6.3 0.7 -1.1
MasTec Inc Industrials Construction & Engineering 3,165 -33.1 3.8 1.3 2.4
Valmont Industries Inc Industrials Construction & Engineering 2,404 -24.5 8.6 1.6 -1.1
Caterpillar Inc Industrials Machinery 69,057 -12.2 7.1 0.3 1.5
Illinois Tool Works Inc Industrials Machinery 53,863 -4.4 15.8 1.6 -1.5
Deere & Co Industrials Machinery 48,452 -10.1 7.4 0.5 1.5
PACCAR Inc Industrials Machinery 25,746 -5.0 6.1 -1.2 2.0
Otis Worldwide Corp Industrials Machinery 24,898 N/A N/A N/A -0.1
Cummins Inc Industrials Machinery 25,261 -2.8 8.3 0.5 -0.4
Fortive Corp Industrials Machinery 22,967 -10.6 19.4 2.9 0.3
Stanley Black & Decker Inc Industrials Machinery 21,078 -16.6 14.1 2.5 5.7
Dover Corp Industrials Machinery 14,013 -14.7 12.6 2.1 0.0
Ingersoll Rand Inc Industrials Machinery 12,239 -19.9 44.0 5.4 0.5
Xylem Inc/NY Industrials Machinery 11,948 -15.1 18.3 1.6 -1.1
IDEX Corp Industrials Machinery 11,543 -10.4 17.9 0.8 -0.3

Source: Bloomberg and Saxo Group

The basket as a whole is down 8% year-to-date on an equal-weighted basis which is in line with the S&P 500. These construction related stocks have generally a low market capitalization except for the machinery companies which are most likely more global in their business footprint. The average net-debt-to-EBITDA is only 1.6x compared to 1.9x for the S&P 500 indicating a lower leverage which means lower default risk all things equal. The basket’s equal-weight valuation is equal to the S&P 500 if Advanced Drainage Systems is excluded from the calculation. The blended 12-month EPS estimates are up on average 1.5% the past four weeks which also mimics the S&P 500. If the Trump administration’s infrastructure plan materializes we would expect estimates to drastically improve.

An alternative to our custom basket is the Invesco Dynamic Building & Construction ETF (PKB:arcx) which holds 30 US-listed companies engaged in providing construction and related engineering services for building residential/commercial/industrial properties, or large infrastructure projects.

Measured since 1 January 2015 this group of stocks (equal-weighted) has done better than the S&P 500 but with a higher beta which makes sense since this industry is pro-cyclical. The high downside beta is also evident in the fact that this group of stocks experienced a 70% drawdown compared to only 32% in the S&P 500.

Besides the potential infrastructure plan by the Trump administration the current Fed policy has pushed down interest rates including the US 30-year fixed mortgage rate which hit a record 3.13% for the week ending 18 June. This is a direct positive factor for the construction sector and as such should help lift earnings and the outlook for these stocks.

Topics: Equities Caterpillar Inc Corporate Earnings

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