Investing in America's Infrastructure
How to Reap the Rewards from the National Infrastructure Bank
Despite all the pre-speech hype, the president’s latest “new” jobs proposal landed on Wall Street with all the force of a lead balloon.
More old than new, it didn’t take investors long to figure out this carcass has been picked over before. Aside from the more predictable parts of the proposal, there is one piece of the plan that does actually offer investors some real substance...
The $10 billion set aside for the establishment of an infrastructure bank.
Why? In case you haven’t noticed, America is falling apart.
From decaying bridges to an antiquated power grid, the systems that make America function have all fallen into serious states of disrepair. Once the pride of the world, these neglected systems are now nearing a breaking point.
According to the World Economic Forum, the United States ranks just sixteenth in the world when it comes to the condition of its physical infrastructure. That’s a dramatic drop from 2007 — less than five years ago — when Uncle Sam held sixth place...
America’s Crumbling Infrastructure
The cracks are everywhere.
In their most recent "report card" assessing the nation's infrastructure, the American Society for Civil Engineers (ASCE) gave the United States a grade of D overall — and estimated approximately $2.2 trillion over five years' time was needed to bring that up to a B.
For transportation alone, the ACSE now estimates some $930 billion is needed over the next five years for maintenance and upgrades. By itself, that equals a whopping $186 billion per year.
But it’s not just about safety; the nation's neglected transportation system also hinders economic growth.
According to a report by the Economic Development Research Group of Boston, deficiencies in America’s roads, bridges, and transportation systems cost Americans roughly $130 billion in 2010. That figure is expected to skyrocket to over $430 billion over the course of the next ten years.
Of course, identifying the problem is much easier than solving it... Decades of neglect are not easily fixed.
Even so, the proposed national infrastructure bank could go a long way to making a nice down payment on long-term costs that are essentially unavoidable.
The proposed “bank” would sell construction bonds to pensions, endowments, hedge funds, and other holders of big pools of cash.
Starting with a government infusion of $10 billion, the bank would then attract many times that figure in new capital that analysts believe could provide up to $600 billion in new infrastructure upgrades.
Solid As Steel
For investors, that makes infrastructure stocks attractive again as the latest stimulus efforts gather steam. And that includes steel stocks, which have been beaten down by 20%-50% this year, depending on the name.
One steel stock that is oversold on the weekly chart is Nucor Corporation (NYSE: NUE).
As the largest U.S. mini-mill steelmaker, a renewed push to rebuild America is certainly one that plays to Nucor's advantage — especially since auto production is also expected to climb into the fourth quarter.
After all, the two largest end markets for steel products in the U.S. are autos and construction. These two markets accounted for 32% of shipments in the U.S. market in 2010, according to preliminary statistics compiled by the American Iron and Steel Institute.
As a result, Nucor's sales and operating results likely bottomed in 2009 and will rise in 2011 and 2012 on a continued upturn in the demand for steel.
Following a 42% increase in revenues in 2010, Nucor projects another 28% advance in 2011, due to yet another increase in prices and shipment volumes.
With a 20.8% market share, that leaves Nucor solidly positioned to meet future growth.
Going forward, analysts estimate NUE's earnings per share will grow by 34% in 2012 to $3.55/share, providing yet another solid boost to the company's share price.
Currently trading with a forward P/E of just 9.57, I believe Nucor is undervalued here.
With a reasonable P/E ratio of 12.75, Nucor can easily trade for $45.26/ share representing 32% upside from here. What's more, Nucor investors can expect to earn a 4.4% annual dividend along the way.
For serious dividend investors, that combination is hard to beat.
As for Obama's new jobs plan, what the Street really wanted was a corporate tax holiday for the $1.4 trillion currently wasting away in offshore accounts.
According to a recent study, if repatriated, this untapped capital could work to add 2.9 million jobs to the economy while adding a $360 billion shot to U.S. GDP.
Now that’s what I call a stimulus...
Too bad what we got instead was more of the same.
Your bargain-hunting analyst,
Editor, Wealth Daily
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