Buying Into the Global Infrastructure Build

The infrastructure build out going on globally has legs. I saw one report a week or two ago that estimated more than a trillion dollars will be spent every year through 2015. You could probably find a report that said whatever you needed it to say but clearly there is going to be a lot of capital deployed for quite a while to come.

I wondered if you could find an infrastructure stock for each SPX sector. Maybe this can be a collaborative effort. I know I will miss things, so please feel free to comment on what I do miss. In this way we might all learn something.

Some of things I mention will be a bit of a stretch. That's the point, it's a theoretical exploration.

Technology - This one is not easy. Part of the modernization of many of the countries is the Internet. This for sure means networking products and storage of data. The bigger names would include Cisco (CSCO) and (EMC). There are obviously smaller names and foreign names that could be part of the discussion.

Financials - Ok, I may be on my own with this one but I think that the exchange stocks represent the financial infrastructure of a country. Most of the exchange stocks I know of (both domestic and foreign) have been pounded on in 2008. One exception is a stock I wrote about for TSCM in March called Climate Exchange PLC (CXCHF) which is listed in London. They are the main player in carbon credit trading. The growth in trading volume is huge, yet it is so small that it might as well not even exist yet.

I bought a little for myself but I had a tough time doing the diligence I think is necessary to own it for clients. Maybe I can access more information in the future. Stock or futures exchanges are infrastructure for the flow of capital. There is modernization within that occurs. Some countries have very primitive stock markets that will only modernize in the future. Who knows how quickly this will happen but it will happen. This may involve more consolidation or other forms of investments but I believe the theme is investable for people who are so inclined.

One other thought here would be Macquarie Group (MQBKY) and Babcock & Brown (BBNLF), two Aussie banks with a lot of infrastructure funds between them.

Healthcare - I have two thoughts here but the argument is weak. First is hospitals. I found four but there are probably others. Lifepoint (LPNT), Community Health Systems (CYH), Health Management Associates (HMA) and Tenet Healthcare (THC). I have never studied this group. I am vaguely familiar with Tenet for what I believe were some accounting issues a few years ago. All four of these are a long way from their 52 week highs, which is a surprise. I might expect a counter-cyclical aspect to these.The other thought would be any companies that do medical billing. I am not aware of any stocks that do this but if you know of any please leave a comment.

Industrial - This is one of the easiest sectors. You could include any of the toll roads, airports, engineers, certain parts of the water theme or Japanese nuclear plant builders. Energy Infrastructure Fund (pipelines and the like) probably fit the bill here. The two biggest names in the iShares (IGF) for this space are Williams (WMB) and TransCanada Corp (TRP). Some may disagree but I think windmills fit in here. Vestas (VWDRY) is big cog here but there are others.

Telecom - The story here is similar to tech. One way or another more people will have telephone access (most likely cell phone). This could also mean things like towers; American Tower (AMT), Crown Castle (CCI) and SBA Communications (SBAC) are three I found. If you know any others please leave a comment.

Utilities - This one is easy too. Pretty much anything in the SPDR FTSE/Macquarie Infrastructure ETF (GII), which is 90% utilities probably fits.

Materials - This one is weak too but I suppose mining equipment (but then that drifts into industrial), mining companies that are big producers in countries that primarily resource countries, maybe certain kinds of chemical companies, anyone else have some ideas here?

Staples and Discretionary - I don't have anything here. If there are any you can think of here please leave some comments. This post is really about process. There have been past posts about some of these things and hopefully this one furthers the discussion.

Comments

[SecureEnergy forProsperity]

Your article raises many of the right issues to consider given the so-called "global infrastructure" boom. Within each macro trend, there are many ways to go wrong, so breaking this down by sector is a good way to evaluate it.

For example, the "water" sector has received a lot of hype recently - to the extent that many ETFs have been developed to capitalize on it. Unfortunately, investors and ETF marketers have not been disciplined about what "water" actually means. Moreover, in the rush to jump on the bandwagon, we've seen a lot of press about the inevitability of a water spending boom - but little discussion of where the funds will come from in a time of reduced tax revenues and national/global recession.

I prefer to maintain the integrity of a macro-trend analysis by identifying companies that I don't believe will be able to capitalize on the trend. For example, in water infrastructure, many have argued that the utility companies will be able to raise water rates to pay for needed upgrades. Let's think about that. These companies are certainly monopolies - but when we see the wrath that even cable television operators get for raising rates, why do we think water utilities will be able to do so successfully? I would argue you can't go wrong betting that people will put off repairs until tomorrow that should be done today, especially in a recession.

Conversely, Insituform (INSU) provides an almost-literal "band aid" solution for broken water infrastructure, with a technology that allows them to repair water mains & pipes internally, without costly digging. There is some hair on this stock for other non-fundamental reasons (governance, hedge fund involvement, etc) but I believe the primary thesis plays well during a recession.

Cable television and fiber optic / broadband internet is also an infrastructure play, but this sector highlights a similar issue as water utilities: Be careful when the companies that may benefit from end-user demand are also the ones that must spend massive amounts of capital. More than likely, there is another supplier one step removed from the utility (or cable company) that stands to benefit from that infrastructure spending being passed through - from higher cable bills to the cable operator to the equipment provider. Cisco (CSCO) would be one example. Moreover, its the company dealing directly with the consumer that takes the *political* heat for the rate increase! Avoid rock-and-hard-place situations.

Your recommendation of the tower companies (AMT, CCI) plays nicely to this thesis, given that it is the wireless companies (Verizon, AT&T) who have to spend money on the infrastructure.

Within cable, I would point out that Mediacom Communications (MCCC) operates in areas where the large phone companies are *not* building out competitive fiber networks. So unlike Comcast and Time Warner Cable, who will face intense competition, Mediacom (MCCC) is actually improving its market position (particularly with competitive DSL offerings raising their prices in light of recent FCC decisions).

Within energy infrastructure, there are many issues to address. One I would highlight is solar power. We periodically read about the idea of a "Manhattan Project" to promote various clean energy technologies. Although I don't agree that the Manhattan Project is the right analogy to use, the idea that a certain Big Bang catalyst is necessary is gaining credibility.

One gold ring for solar companies would be a concerted government effort to develop large-scale solar projects in the Southwest. These projects are beginning on a small scale. And clearly, with every advance in solar cell efficiency and cost reduction, the price tag for a multi-gigawatt "Marshall Plan" (I prefer this analogy) is improved.

Solar continues to benefit from rapid but incremental growth. If a Federal government program to develop truly utility-scale solar is launched, the PV manufacturers are positioned for a home run. Silicon makers may benefit, but may be left out if a thin-film or non-silicon technology is capable of yielding the efficiency necessary to make large-scale buildout economic. Longer term, however, the entire industry would benefit as manufacturing plants would expand and economies of scale would lower costs across the board.

There are many risks to juggle here: technology improvement, Federal energy policy, local & state land restrictions, and oil prices, to name a few.

From water to television to solar, a macro infrastructure boom will still result in losers as well as winners.

[Andy Green]

I would also take a look at both MasTec (MTZ) and Macquarie (MIC).

MasTec operations include building, installation, maintenance, and upgrade of communications and utility infrastructure. The company primarily builds underground and overhead distribution systems, such as trenches, conduits, power lines, and pipelines that are used in its customers' networks that provide communications and power delivery. It also installs buried and aerial fiber optic cables, coaxial cables, copper lines, electrical and other energy distribution systems, transmission systems, and satellite dishes. It's a great play on Verizon's FIOS as well as the upcomming hurricane season. Servicing both Florida Power & Light and Oncor (Texas) utility lines any hurricane in these areas will benefit MasTec. Recently MasTec was trading at a 12 p/e which represents a 54% discount valuation to its peers.

Macquarie Infrastructure Co. Trust (MIC) is a great trade on a variety of infrastructure plays. With MIC you get airport services business, an airport parking business, a district energy business, a gas production and distribution business, and a 50% interest in a company that owns and operates a bulk liquid storage terminal business. MIC continues to increase their dividend, which today stands at a comfortable 8% yield.

[Heisenberg]

I'm looking for an ETF that captures the Infrastructure theme via the global construction and engeneering firms that are going to build all these roads, power plants, airports...etc. The closest I have found is half of PKN. Anybody got a better way ?
Thanks

[Michael]

i think the wireless carriers themselves in developing economies are a good place to play. people seem to prefer a cell phone to running water in developing econonmies.

[southshoreinvestor]

Look at MDU Resources (MDU) for the US infrastructure build & fix with an energy hedge built in. They will benefit from the highway spending bill. MDU has a long track record, good dividend growth, and E&P assets in the Bakken.

NuStar (NS) is an energy infrastructure MLP with an 8% yield. They operate in the US and parts of Europe and just bought into asphalt refining on the US East coast. Road paving asphalt sales will account for up to 20% of revenues and the rest of their biz is regulated storage/pipelines with inflation protection. All MLP's require access to credit and equity issuances for growth. Fear here combined with hedge funds and CEF's dumping MLP PIPE and common shares has provided a timely opportunity to buy into these assets as credit fears subside.

I agree that American Tower (AMT) is a great infrastructure play. AMT operates in the US, Mexico, and Brazil, and continues to grow. I would expect that AMT will eventually run out of growth opportunities and begin to pay out dividends - as a cash cow. Until then AMT has been consistently buying back shares in addition to expanding their towers. They also just increased the expected lifetime estimates for their towers.

Also, you seemed to miss the standards, such as CBI, FLUOR, BGC, ABB, etc. Perhaps you could even pair BGC with PCU for a hedge on copper pricing.