How to play the infrastructure boom
Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
Some of the best investments are right in front of us every day. Yet they're often overlooked because they're so much a part of our daily lives they don't register with the conscious mind.
One area investors may underappreciate is infrastructure -- things like telephone poles, towers for wireless communication, substations for electric utilities, and guard rails along roadways, to name just a few. Although infrastructure is the very foundation of society, I suspect it's probably far from the first thing on investors' minds.
However, I expect it to be an excellent investment in coming years. In the U.S. and other developed countries, infrastructure has been neglected for so long it now needs some heavy-duty overhaul. Many areas of the emerging world have little or no infrastructure at all and will need tremendous amounts put into place for the first time.
According to the McKinsey Global Institute, as much as $67 trillion in spending on infrastructure of all types will be needed worldwide between now and 2030. Roads and power grids will be in greatest demand, followed by water utilities and telecommunication networks, the Institute says. In the U.S., an estimated $2.2 trillion of infrastructure spending will be necessary during the next five years alone.
Exactly how much of this spending will actually occur is anybody's guess, considering what a hard time the U.S. and other governments have coming to budget agreements. However, I'd be surprised if global infrastructure outlays weren't well into the trillions during the next decade. Otherwise, the development of emerging countries will slow considerably, and the U.S. and other developed regions will further decay.
If you agree, there's an investment you'll definitely want to know about -- the stock of a leading infrastructure company that got its start in farm irrigation equipment in 1946. In addition to that and the other types of infrastructure I've already mentioned, the company now also makes traffic signals, galvanized metals, and high-tension electric and traffic light poles.
I'm referring to Valmont Industries (VMI), which has increased sales in nine of the past 10 years and posted an annualized growth rate of 12.4 percent during that time. As a result, sales more than tripled to the current $3.3 billion from $1.03 billion in 2004. Earnings per share (EPS) are up more than ninefold to $10.35 from $1.10 ten years ago. Valmont's stock has been awesome, returning 22.7 percent a year during the past decade versus 7.1 percent annually for the S&P 500.
The company has high chances for more outperformance, in my opinion, because it's already doing extensive business in several of the main areas where there's a particular need -- telecommunications, power grids, and water provision. Indeed, the Engineered Support Structures segment that produces communication towers and telephone poles currently generates annual revenue of nearly $900 million and has been growing at a solid 6% pace in recent years. So the segment's sales should easily exceed $950 million this year and could soon be doing more than $1 billion of business annually.
The utility support structures segment, which makes concrete and steel substations and power transmission poles for electric utilities, has been Valmont's fastest-growing operation lately, thanks to increasing volumes and declining costs. Annual sales in this segment are up more than 20 percent a year during the past few years to the current level of $960 million. Going forward, they could keep rising at a similar pace as global electric power demand continues to soar.
Sales have been climbing at 15 percent pace in the irrigation segment, which is now more than an $880 million-a-year business. Along with the utility support structures segment, irrigation should continue growing quickly, particularly in developing markets where limited water supplies should create excellent demand for the irrigation systems needed to support livestock and grow food for ballooning populations.
However, I don't mean to suggest the segment will be weak domestically -- quite the opposite, in fact. Although the issue is often swept under the rug, water scarcity is a major issue in North America. California and other parts of the West Coast, for instance, are in the midst of what could be the area's worst drought in 500 years, according to some researchers.
The impact has been huge. For instance, farmers in Nevada aren't bothering to plant crops since there's little chance they'll grow. Ranchers in Northern California and New Mexico have had no choice but to sell off cattle because grazing fields are barren. Issues such as these clearly spell opportunity for Valmont's irrigation business and should contribute to record sales for the segment in the future.
Risks to consider: As an infrastructure provider, Valmont often deals with the public sector and government agencies, which have been more tightfisted with their budgets in recent years and may decide to cancel or delay many infrastructure projects.
Action to take: Valmont is a top stock to buy for the coming global infrastructure boom and should provide attractive shareholder returns for many years. Consensus estimates are for 11 percent-a-year EPS expansion for the next five years to about $17.40. This implies 88 percent upside from the current stock price of about $148 to $278 within five years, based on a historical price-to-earnings (P/E) ratio of 16. With a current P/E of 14 and a forward P/E of 12, shares appear to be a very good value right now.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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