America’s infrastructure stands to improve with the passage of a new bill that will pour money into crumbling cities. Many stocks could see serious upside as a result of the initiatives, including those of equipment manufacturer Caterpillar (CAT) and steel manufacturer TimkenSteel (TMST).
The $1 trillion infrastructure bill passed last November by President Biden seeks to improve America’s infrastructure, but experts are skeptical about its ability to make a difference in the short-term. The American Society of Civil Engineers’ Report Card for America’s Infrastructure, which comes out once every four years, gave the U.S. a C- rating, deeming it mediocre.
In order for a country to flourish and grow efficiently, it needs safe roads, bridges, clean water, environmentally-friendly transportation, and fast and seamless network connectivity. However, America seems to be failing in these areas, which is not what is expected of a $20.89 trillion economy.
What is Making Experts Skeptical?
Many times in the past, America has tried to improve its infrastructure. More often than not, it has failed to yield results at par with the amount spent on it. Naturally, several experts are still unconvinced about the effectiveness of the current infrastructure budget.
Also, the country’s massive existing infrastructure base is aging and requires huge investments to be repaired or replaced. In an inflationary and high-interest-rate environment that is further bogged down by a shortage of labor, the Bipartisan Infrastructure Law seems to be taking a backseat temporarily. This is making experts wary of the spending momentum of the budget.
America’s poor infrastructure dates back to the beginning of the industrial revolution. Infrastructure projects like the national railroad network were developed without proper planning by the government or the private builders in most cases.
To overhaul such a widespread issue, there needs to be a vast level of planning, time, and money. However, the multiple headwinds that are shaking the economy from all sides currently are keeping the government busy.
Direct and Indirect Effects of Poor Infrastructure
Now, the economy is already suffering from major port bottlenecks, thanks to global supply-chain constraints. The smooth functioning of a supply chain requires better infrastructure (proper roads, bridges, railway connectivity, etc.), which, in turn, can be instrumental in boosting a company’s business. However, America’s potholed highways and dilapidated bridges are not helping ease this situation.
Moreover, a shortage of truck drivers, resulting primarily from low wages and high fuel costs, is another aspect of poor infrastructure budget allocation that is less obvious but is significantly impacting businesses.
Companies in the home improvement industry, such as Lowe’s (LOW), are facing the heat of delayed deliveries due to jammed ports, poor highway and railway conditions, and labor shortages. Inventory is rising amid the slowdown in demand and these persistent supply-chain issues.
Additionally, to address the need for pollution-free transportation, electric vehicles (EV) are key. However, the present lack of infrastructure for EVs, especially in rural areas, is prompting companies like Rivian (RIVN) to invest their own money heavily in building more charging stations, which are margin killers.
Companies That Stand to Benefit When Projects Take Off
Overall, the legislation is designed for the benefit of the economy. Different sectors across the supply chain stand to benefit from the law as well, including construction, steel, engineering services, and others.
The construction industry is the most obvious one to gain from the commencement of projects. Caterpillar’s (CAT) heavy construction equipment dominates the market for construction and mining machinery. Needless to say, its equipment will be on top of people’s minds when projects roll out.
The company has recently been weighed down by shrinking margins, and new project deals can turn that around for the company. This, in turn, will translate into better shareholder returns, maintaining its reputation as a strong dividend stock.
Wall Street is maintaining a cautiously optimistic stance on CAT, possibly based on the near-term obstructions that might delay infrastructure development. The stock has a Moderate Buy consensus rating based on 10 Buys, five Holds, and two Sells. The average price target on CAT is $223.63, reflecting 22.5% upside potential from current levels.
One underdog that is expected to be among the biggest winners from the infrastructure bill is TimkenSteel (TMST). TimkenSteel manufactures alloy steel and produces air-melted alloy steel bars, tubes, and other components. The company also provides thermal treatment services and machining services in the U.S. and abroad.
Higher demand from the industrial and energy sectors is benefiting the company. Moreover, cost-reduction efforts and manufacturing efficiency are helping its margins.
Heavy constructions and upgrade projects in railways, bridges, network towers, and other infrastructure will boost the demand for TimkenSteel’s steel products and engineering services.
The stock has a Moderate Buy rating based on one Buy rating from KeyBanc analyst Philip Gibbs, with a price target of $24.
Conclusion: Many Industries Will Benefit from Eventual Infrastructure Improvements
Poor infrastructure has been hurting the growth of many businesses for decades, and the trillion-dollar infrastructure upgrade bill brought fresh hopes to these businesses. These hopes were then watered down by recent macroeconomic issues. However, once the macro headwinds ease and infrastructure spending starts picking up speed, numerous industries stand to benefit from it.
It will be interesting to see how investors respond as the government’s infrastructure improvement initiatives pull various companies out of the rut and onto a smoother road to growth.