The Obama Infrastructure Play

President-elect Barack Obama has been in the news over the past few weeks speaking about “the largest investment in infrastructure since the creation of the interstate highway system under Dwight D. Eisenhower,” but we’ll have to wait and see if democrats in the legislative branch actually ask “how high” when Obama says “jump.” If all goes according to plan, Obama is looking to launch a 2-year, $850 billion stimulus package with a large proportion going towards an extreme makeover of our  national infrastructure.  This will target roads, bridges, and other public works. In this potential tax-payer’s nightmare, some industrial companies will end up coming out on top.

Go Back to Construction and Engineering

Over the past year, construction and engineering companies such as Foster Wheeler (FWLT), have been getting slaughtered by the masses through project delays while the credit crisis continues to unravel. As Obama caters to both the unemployed and the hurting industrial sector, there is no doubt a stimulus like this will “re-construct” a rally in construction and engineering companies as investors prepare for the new stimulus.  The industry has already started enjoying the run-up in stock prices due to speculation. While many companies like Jacob’s Engineering (JEC), Flour (FLR), and Joy Global (JOYG) will probably be awarded some contracts, the key is to pick one for the long-run. Caterpillar (CAT) is sitting in a great position to not only capitalize on a U.S. stimulus, but also from foreign infrastructure upgrades (such as China’s new $586 billion plan five year stimulus package that is also focused on infrastructure upgrades).

Why Not Any of the Other Major Players?

Caterpillar has been driven into the ground because of the same reasons that drove every other company into the ground: slower growth in new infrastructure projects. While Caterpillar manufactures mining as well as Oil and Gas equipment, it doesn’t rely as much on higher energy and commodity prices as other companies do to be awarded new contracts. For example, 50% of Flour and 43% of Jacob’s Engineering’s revenue and operating profit was earned through contracts and services with Oil and Gas companies. With crude oil trading in the upper thirties to low forties, (down from the high of $147 in the summer), it’s no surprise that the entire Oil and Gas industry will slow (or halt) expansion and reconstruction until it is economically profitable to once again continue these projects. Joy Global, which specializes in mining, will likely see higher activity in 2009 with a rise in commodity prices attributed to an infrastructure makeover.

The 500-Pound Gorilla

In early November, China announced their $586 billion plan to ease the global economy. Behind Tokyo-based Komatsu, Caterpillar has the second-highest market share in China. Not only will Caterpillar catch some of the infrastructure action, but through key-acquisitions in China (and management’s Vision 2020 plan), the company is making one of their goals to continue to expand presence in the Chinese market. Caterpillar sees an increasing exposure to the fastest-growing economy as an obvious must for future success.  With many analysts betting on China’s recovery to come before that of the United States, Caterpillar is well positioned to take advantage of either opportunity.

The Fundamentals

Even through this recessionary slump, Caterpillar is able to maintain a strong balance sheet with only slightly elevated net receivables and inventory that I don’t find too far out of the ordinary. Caterpillar’s strong dividend yield of approximately 4.00% is one of the tops in the Construction and Engineering industry. Looking forward, the PEG ratio of 0.68x implies that Caterpillar’s earnings are likely to grow significantly after the economy touches the bottom. Additionally, operations are likely to become more efficient due to decreases in energy and commodity prices. Caterpillar is in a good position to benefit from the global infrastructure hype. While a lot of other construction companies will experience price jumps with an over-all rally in the sector, I feel the companies heavily exposed to commodities will offset any activity brought on by a stimulus. Whether or not you like Caterpillar, getting into construction companies in the next few months will not only allow you to buy solid companies at clearance-level prices, but will also position your portfolio for an upside which many analysts are predicting to occur in the second half of 2009.

Disclosure: None

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