With the President unveiling his latest efforts to revive the U.S. economy back in September, infrastructure has once again become the topic du jour. During the depths of the financial crisis, a variety of nations used construction and infrastructure spending as a way to jump-start their stagnant economies. Investors flocked into funds like the iShares S&P Emerging Markets Infrastructure (Nasdaq:EMIF) as a way to access the theme. Despite the nearly $3 trillion already spent on global infrastructure construction during 2009 and 2010, analysts calculate there is still more work to be done. The Obama administration's recent pledges along with the emerging world's spending goals still make the theme valid for the long term.
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Pick-n-Shovel Part II
The latest jobs package from the Obama administration included $30 billion for modernizing public schools, $27 billion for the highway system, $9 billion for rail systems and $15 billion for the rehabilitation of homes, businesses and communities. The jobs package also creates a $10 billion National Infrastructure Bank that would provide funding for infrastructure projects. The bank would sell bonds like Ginnie Mae to get private investors involved. While any amount of spending on our nation's infrastructure is good, this is still a drop in the bucket compared to the amounts needed as estimated by American Society of Civil Engineers. The group predicts that our nation will require $2.2 trillion in spending over the next five years to repair our poor infrastructure. By 2030, investment needs for electricity utility infrastructure could reach $1.5 trillion, and nearly $277 billion dollars will need to be spent to support our aging water distribution system. While congress has effectively killed the President's total plan, both sides of the aisle agree that our nation's infrastructure needs help and the majority of the construction proposals could see the light of day in any new legislation. (For related reading on Ginnie Mae, see What Is A Ginnie Mae Security?)
Globally forward-thinking investors may not need the U.S. to act in order to profit from infrastructure. CIBC World Markets estimates total infrastructure spending over the next 20 years will need to reach nearly $35 trillion and many governments around the world are already spending major amounts. The World Bank's Private Participation In Infrastructure Database reports more than 4,300 different projects currently underway in low-to middle-income nations across the globe. For example, Nigeria has begun construction on a multi-billion-dollar Trans-Sahara gas pipeline and Chile has begun expansion of its Metro Santiago underground rail system. This spending will only accelerate as the emerging world begins its transition to the modern one.
Buying the Long-Term Trend
For investors, the trend of infrastructure improvements, both here and abroad makes a great long-term portfolio addition. Those firms who do the physical construction make an ideal way to play this build-out. Both the PowerShares Emerging Markets Infrastructure (NYSE:PXR) and the First Trust ISE Global Engineering & Construction (NYSE:FLM) offer broad exposure to the companies that are involved in the heavy lifting. The PowerShares fund also includes a heavy dose of the materials companies that provide the steel and aggregate needed for construction.
Tutor Perini (NYSE:TPC) could be an undervalued infrastructure pick. The firm provides construction and engineering services to a variety of global civil and public clients. Tutor currently has a current backlog of projects worth nearly $5 billion and has a low debt-to-cash ratio. Shares of the firm have dropped heavily in the recent global sell-off and trade at a forward 6. Like Tutor, both Sterling Construction (Nasdaq:STRL) and Chicago Bridge & Iron Company (NYSE:CBI) represent undervalued engineering plays.
Port infrastructure and maintenance tends to be one are that investors ignore when thinking about heavy construction. Both Great Lakes Dredge & Dock Corporation (Nasdaq:GLDD) and Orion Marine Group (NYSE:ORN) have sold off heavily as investors fear that decreases in Army Corp of Engineer spending will affect these firms. However, both firms now offer bargains as Great Lakes has been expanding internationally and Orion is benefiting from upgrades in the Gulf of Mexico. (For related reading, see Will Obama's Plan Boost Infrastructure Names?)
The Bottom Line
The Presidents recent proposals for increased infrastructure spending underscore the global phenomenon. Many governments are plowing large dollar amounts into upgrading and improving these vital pieces of economic growth. The previous heavy construction firms, along with Granite Construction (NYSE:GVA), make ideal plays on the theme.
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