Stealth Infrastructure Plays

By Aaron Levitt | March 29, 2010 AAA

Deteriorating infrastructure is the 800 lb gorilla in the room. A recent risk report from Lloyd's states that Underinvestment in critical infrastructure such as water/sewer pipes, roads and telecommunications could have dramatic effects on society in the long run. Disease spreads rapidly, as seen with SARS and swine flu, without proper water services. And let's not forget that in 2003 more than 50 million North Americans suffered through the largest power outage in history as the grid failed. But as the world slowly digs itself out of its funk, new stimulus projects are channeling billions of dollars into new bridges, roads and pipes.

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More than $80 billion of the massive American Recovery and Reinvestment Act was earmarked for infrastructure spending, much of which is still being doled out. More recently, the Obama administration put into place a $17.6 billion jobs bill that subsidizes state construction bonds and allocates an additional $19.5 billion for a sweeping highway construction program. Around the emerging world, places like China and Brazil are adding to their infrastructure projects providing new avenues for their growing middle classes.

With all this money going into various projects, it's no surprise that investors want infrastructure in their portfolios. Funds like PowerShares Emerging Markets Infrastructure (NYSE: PXR) and the SPDR FTSE/Macquarie Global Infrastructure 100 (NYSE:GII) allow investors to own a wide swath of the prominent companies associated with the sector. However, there are plenty of small- and mid-cap companies just out of reach of these indexes that stand to benefit from increasing infrastructure spending. Here a few top picks.

The Stealth Picks
Every year, more than 10 billion rides are taken worldwide using Cubic Corporation's (NYSE:CUB) fare collection systems. The company provides turnkey solutions needed to set up automated fare collection systems for public transport including bus, rail, and toll roads. The company continues to add new contracts to its list such as its recent $15 million deal with South Florida Regional Transportation Authority. The company also has a strong balance sheet, ending the first quarter of 2010 with $258.2 million in cash and short-term investments versus total debt of only $21 million.

Millions of people worldwide use Telvent's (NASDAQ: TLVT) software solutions without knowing it. More than 60% of all the gas and oil moving through pipelines in the Western Hemisphere is controlled through its pipeline efficiency software. EZ Pass toll users through the northeast are also familiar with its systems. Telvent is also one of the leading producers of smart-grid technologies and other green power management systems. The company is actually tied with the General Electric (NYSE: GE) for the number two spot in systems that monitor and control power for efficiency gains. Shares trade at a forward P/E of around 12 and yield 1.7%.

Hurricane Katrina helped cement the need for a stronger system of levees and flood gates around U.S. shores. Great Lakes Dredge & Dock Corporation (NASDAQ: GLDD) with its international presence in marine construction, dredging, and demolition, stands to benefit, both from such protection methods as well as harbor and wetland restoration. Twenty-five percent of Great Lakes' operations come from overseas, with the Middle East holding the majority. Shares yield 1.4% and trade at a reasonable P/E of 17.

Bottom Line
Investments in infrastructure cannot be ignored. World governments will need to continue their spending in this area if they are to participate on a global level. There are many broad-based funds, such as the iShares S&P Emerging Markets Infrastructure (NYSE: EMIF), that can give investors a broad taste of the sector. However, investors are ignoring opportunities if they just stick to the ETFs. The preceding three picks are great examples of the small and mid cap players in infrastructure. (To learn more, see Build Your Portfolio With Infrastructure Investments.)

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