Betting On Infrastructure

By Sham Gad | March 10, 2010 AAA

With the story for increased infrastructure demand continuing to grow, investors have a wide menu of options to choose from to get in on the action. As always, prudence dictates that the merits of the individual business should precede the excitement one may have over the industry. In other words, don't forget value.

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Materials Are The Foundation
Aggregates are the key ingredient for all things infrastructure. Bridges, roads, and sewer pipes all need tons of rock. Investors looking for global diversification in one stock need look no further than Mexican cement giant Cemex (NYSE:CX). The company's leveraged balance sheet has hurt the company over the past couple of years as worldwide infrastructure demand plummeted when credit markets froze. But being one of the largest companies in your respective industry has its advantages during tough times. Credit markets have thawed and shares today trade for half of book value at $10. And with operations all over the world, the instant appeal is growth from emerging markets. (For more, see Digging Into Book Value.)

Ameron International (NYSE:AMN) is a company that takes raw materials and turns them into things like concrete pipes for water transmission and sewage. Additionally, its infrastructure division supplies steel poles for highways and traffic signals. Its international division does the same things through joint ventures in places like the Middle East and Asia. Unlike Cemex, Ameron has a pristine balance sheet. It's a $660 million company with net cash of approximately $130 million. While Ameron's operations were hit hard as the economy went into a tailspin, it's an excellent little business with a diverse footprint.

Building For The Future
All future infrastructure demand will require labor. That's great news for the job market and the companies that provide such work. Out west, Sterling Construction (NASDAQ:STRL) is doing just that. In fact, Sterling does nothing but infrastructure type work in Texas and Nevada. Over the years it has grown by acquiring local infrastructure businesses. The company's circle of competence includes all things infrastructure - highways, bridges, water infrastructure, and some rail. It serves local and regional municipalities. Shares have rallied in 2009 from a low of $12 to $20. Still, the company has no net debt and trades at less than 14 times forward earnings.

Giant Fluor (NYSE:FLR) is a more diversified construction play with customers that include major energy companies, utilities and government agencies. It's an $8 billion company that generates over $20 billion in sales. Profit margins, depressed somewhat, are 3% which equates to over $600 million in earnings today. When you account for the nearly $2 billion in net cash on the balance sheet, Fluor trades at less than 10 times EV/Earnings in today's economy. Another very attractive larger player is Foster Wheeler (NASDAQ:FWLT), which trades at less than 10 times forward earnings but less than 8 times earnings on an enterprise value basis.

Working The Bottom
These infrastructure and construction plays are climbing out a deep cyclical bottom. It's a matter of when, not if, the demand for their services rebounds nicely again. When this occurs, expect increasing profitability and cash flow generation. (For more, see Build Your Portfolio With Infrasturcture Investments.)

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