Barack Obama's plans to stimulate the economy seem to offer a rare buying opportunity for stock watchers: infrastructure. The president-elect has pledged billions of dollars (the latest projections jumped to between $675 billion and $775 billion over the weekend) in spending to revive the economy, create 3 million new jobs, and strengthen roads, bridges, and other key systems in what could be the most ambitious building program since the 1950s.
But it's not terribly clear how investors should reap rewards from the Obama spending plan. While a host of infrastructure stocks saw temporary Obama-induced bumps earlier this month, a sustained rally in these stocks isn't a sure thing, for two reasons:
First, the government isn't about to spend billions because the economy is in good shape. So, this plan is about job creation, not making money for Wall Street, and there's a risk that projects won't be the sort that produce hefty profits. Plus, some spending could go to cash-strapped states that may need backstopping from the federal government to keep existing infrastructure plans on the rails. According to the National Governors Association, states face budget shortfalls totaling between $140 billion and $180 billion over the next two fiscal years (though the association has identified $136 billion worth of infrastructure projects that should be included in the stimulus package).
Second—and more important—no one is sure where exactly the cash is going or when it will be available. While the size of the Obama package would undoubtedly have an impact, analysts say passage of a spending bill could take until April, which would push the impact of new spending well into 2009. Still, Alex Rygiel, an analyst at FBR Capital Markets, predicts there are $64 billion worth of "ready-to-go" heavy construction projects that could start construction 180 days after receiving funding.
Whatever the plan's outcome, it's best as an investor to be ready. Here are a few companies to look at before cash starts to flow:
A leader in smart-meter technologies, Itron could be one of the few sure bets for a stimulus-related bump. Itron is the dominant player in the sector, helping build the high-tech systems that will revolutionize how America measures and uses energy, gas, and water in our homes and businesses. Itron did hold $1.2 billion in debt as of September, but Standard & Poor's says its free cash flow of around $65 million at the end of 2008 should keep liquidity troubles in check. S&P also predicts that Itron's 2008 revenue will grow a healthy 32 percent. As of September, the company's backlog of work had jumped 51 percent, to $1 billion, from a year earlier. On December 11, UBS upped its price target on Itron from $50 to $70 a share. It trades near $45 today. Quanta Services
Will the Obama administration really commit to solar and wind energy? Watch Quanta Services to find out. The company has a solid business building electricity transmission and distribution systems (plus cable, natural gas pipes, and other projects), and it's angling to become the company that gets juice from solar fields and wind farms to end users. CNBC's Jim Cramer put Quanta on his list for 2009 as a bet that commitments to clean energy infrastructure will still move ahead next year despite a worsening recession. Quanta also boasts a sizable work backlog, so it should have plenty of cushion to ride out much of this downturn. The stock has taken a beating this year, falling almost 60 percent from a record high near $35 before bouncing back this month to above $18. The problem with Quanta is uncertainty about to how the recession hurts the rest of its business. Still, if capital spending in traditional electricity sector holds, and if new green energy projects see some government cash, Quanta stands to win big. Fluor
A leader among the big-name engineering and construction companies, Fluor gets about 45 percent of its business from U.S. projects. The Irving, Texas, company boasts a large backlog of work and a fair amount of cash on hand. Still, while any spending plan could easily give Fluor some business, it's not clear that the sort of massive projects Fluor specializes in will be the first to be funded, analysts say. Even if they are, the highly diversified company still has a global economic slowdown to contend with. Soaring oil prices and new drilling projects were a boon for Fluor, but with oil slumping below $40 a barrel, offsetting that growth with new projects could be a challenge. Last week, Goldman Sachs cut its rating on the U.S. engineering and construction sector to "cautious" from "neutral," and cut Fluor to "sell" from "neutral."