Infrastructure in 2022: The Complete Investors Guide

Improving America’s infrastructure is one rare area of bipartisan agreement. According to Gallup, 68% of Americans expressed support for infrastructure spending.

Further, in 2021, the American Society of Civil Engineers (ACE) gave America a “C” in terms of infrastructure, which was an improvement from a “D” last year. 

• According to the ACE, nearly 7.5% of bridges are structurally deficient. 
• US airports are facing a $52 billion funding gap over the next decade to keep up with maintenance.
• There are over 80,000 dams in the US with an average age of 53. An estimated 1,800 are “highly hazardous” and require immediate improvements.
• The electrical grid is aging. As witnessed in many states, there is the potential for outages in certain scenarios with extreme weather.
• 16% of highway roads are in poor conditions which led to an estimated $190 billion in wasted time and fuel.
• 18% of US schools need maintenance and upgrades
• 7% of wastewater facilities are also in “critical” need of upgrades

What’s remarkable is these figures are much improved over the past year and projected to keep improving. A major reason is the bipartisan passage of the Infrastructure Investment and Jobs Act which was signed into law on November 15, 2021. Another is that state and local governments have large budget surpluses due to the federal government’s support during the pandemic. 

Infrastructure Spending

The Infrastructure and Investment Jobs Act is about $1.2 trillion in size. Some of the areas it targets include providing and ensuring clean water free of lead, increased access to high-speed Internet, repairing and rebuilding roads and bridges, increasing access to public transit, and upgrading airports and ports. 

In total, the legislation is expected to create 1.5 million jobs over the next decade. According to reports, President Biden is considering an infrastructure package worth between $2 trillion and $4 trillion that would include upgrading roads, bridges, tunnels, and highways. Significant investments in the country’s energy infrastructure to prepare for the phasing out of fossil fuels. Additionally, he wants to improve the digital infrastructure by expanding broadband access to rural areas. 

Investing in infrastructure has the short-term benefit of increasing employment and economic activity. In the long-term, it increases the productive capacity of the country by facilitating commerce and lowering costs. In fact, this is a major step in combating inflationary pressures on a longer-term basis. 

Decades of under-investment in infrastructure is one of the culprits behind transportation bottlenecks and supply chain issues as the US was unable to adapt in a quick manner. Infrastructure investment will also allow the re-shoring of many American industries which is another bipartisan priority for national security interests.  

Secondary and Tertiary Effects of Infrastructure Spending

Investors should also understand that infrastructure spending on this scale is likely to have secondary and tertiary effects, such as:

• Long-term interest rates will see an uptick on increased growth expectations.
• Industrial commodities like copper, iron ore, and steel will see further gains.
• Emerging Markets will outperform due to increased exports.
• Wages will likely rise and contribute to inflationary pressures, possibly accelerating the Fed’s schedule for hikes.
• Higher costs due to commodity and wages rising could lead to eroding margins for some companies.

Therefore, investors should consider a wide array of stocks that will benefit from these trends. Many of these stocks have attractive valuations and are likely to outperform due to a combination of earnings growth and multiple expansion. Five top infrastructure stocks to consider buying are Rio Tinto (RIO), Cummins (CMI), ArcelorMittal (MT), Eaton (ETN), and Southern Copper (SCCO).

Rio Tinto (RIO)

Infrastructure spending means that demand for commodities will increase, specifically industrial metals like aluminum, zinc, copper, iron ore, and titanium dioxide. These metals are important inputs for any sort of construction project. Already, these metals have been quite strong over the past few months as investors anticipate strength in the industrial economy in part due to infrastructure spending.

When it comes to industrial commodities, RIO is one of the major producers with mines in six continents. The company’s primary product is iron ore which is the raw material used to make steel. Steel is also a necessary component of any infrastructure project. For investors, RIO is particularly attractive given its PE of 6.9 which means it has the potential for earnings growth and multiple expansion.

RIO is rated a B by the POWR Ratings which equates to a Strong Buy. The POWR Ratings are calculated by compiling 118 different factors, each with its weight. Over the last 30 years, B-rated stocks have had a compound annual return of 20.1%, while the S&P 500 has returned 7.1% over the same time period. 

The POWR Ratings also evaluate stocks by various components. In terms of Quality, RIO is rated a B. This isn’t surprising given that the stock is one of the largest commodity producers in the world. The stock will certainly benefit from the current inflationary environment due to its massive asset base.

Cummins (CMI)

CMI is a leading manufacturer of engines used in heavy and light trucking. Its engines are renowned for their performance, quality, and reliability. However, shares have underperformed and fallen out of favor as diesel engines are slowly being phased out due to environmental concerns. However, in anticipation, CMI is aware of this and pivoting to cleaner means like natural gas and electric powertrains. 

Yet, in the short-term, the boom in infrastructure spending is going to benefit CMI as spending for trucks will certainly increase. Additionally, many of its competitors have been leaving the business which is leading to more market share for CMI. 

CMI has a forward PE of 11.1 which is about 45% below the S&P 500’s forward PE of 19.5. It also pays a dividend yield of 2.6% which is higher than the S&P 500’s dividend yield and the 10-year Treasury. Despite these strong value characteristics, it expects to grow earnings by 30% over the next 12 months. 

The POWR Ratings rate CMI a C which equates to a Neutral rating. CMI is rated a B for Value which isn’t surprising given the company’s strong financial position with low debt and cheap valuation. 

It’s also rated a B for Quality. This fits with Cummins’ best-of-class engines which have created significant customer loyalty and pride. Its management team also has a long track record of growing earnings through various market climates. 

ArcelorMittal (MT)

Currently, we are seeing strength in many industrial commodities following a decade of underperformance. And, this is certainly related to the increase in infrastructure spending, construction, and capex on a global scale. 

On the supply side, the industrial sector has been less affected by the coronavirus than many other sectors as total output is running just 5% below pre-coronavirus levels. Further, there’s optimism that demand will continue to improve given the aforementioned trends. 

One of the biggest beneficiaries of this state of affairs is MT which was formed in 2006 via the merger of Arcelor and Mittal Steel. MT accounts for 5% of the world’s steel supply and has a presence in more than 60 countries.

MT’s shares look quite attractive from a growth and value perspective. It has a forward PE of 3.8 which is significantly cheaper than the S&P 500. With inflation, the company should continue to benefit with increased pricing power especially since it’s a vertically integrated producer of steel.

The last decade was tough for the steel industry as it grappled with oversupply and weak demand. MT used this weakness to improve operations and gain market share. Now, it has the ingredients of a big winner as demand and supply conditions are much more favorable. 

MT is rated an A by the POWR Ratings which equates to a Strong Buy. This is consistent with the company’s market share, operational excellence, and improving economic conditions. In terms of Quality, MT is rated a B. This is likely due to the company’s increasing margins and standing as one of the top steel companies in the world. 

Eaton Corporation (ETN)

ETN was founded in 1916 and is based in Dublin, Ireland. The company manufactures and designs fluid power systems for industrial, mobile, and aircraft equipment and electrical systems and components for power quality, distribution, and control.

A major component of infrastructure spending involves strengthening the electrical grid. The electric grid in the US is decades-old and as the recent outages in Texas showed, they are in need of improvements especially for situations with extreme weather. Another factor is that as fossil fuels are phased out, electricity demand will increase. 

Thus, ETN will be a major beneficiary of this type of investment. In 2022, ETN’s earnings are expected to increase by 13% and revenues by 4%. This follows a very impressive 2021 with earnings growth of 51% and revenue growth of 9%.

The POWR Ratings are also bullish on ETN as it has a B rating which equates to a Buy. This is consistent with the improving macroeconomic environment for ETN. ETN also has an Industry Rank of a B as these positive catalysts are benefitting nearly every stock that produces industrial equipment and machinery.

The POWR Ratings also evaluates ETN by Value, Growth, Sentiment, Quality, Stability, and Momentum. To learn more, click here.

Southern Copper Corporation (SCCO)

SCCO has operations in Mexico, Peru, and Chile. It’s the fifth-largest copper producer in the world with 1.02 million pounds. Copper accounts for 80% of the company’s revenue. Its cost per pound of production was under $1 in 2019.

It might also have the most upside relative to other copper stocks because it has the largest copper reserves of any publicly-traded company. The company is also expected to have the highest increase in copper production as it’s aiming for an 80% increase over the next five years.

Aside from its substantial growth prospects, another thing that makes Southern Copper stand out as a top option for investors is its low-cost operations. In 2018, the company produced copper for a net $0.87 per pound after taking into account by-product credits, which is among the lowest in the sector. The company sees that number falling to $0.80 per pound in 2022 as it benefits from a project at its Toquepala mine in Peru.

The outlook for copper prices is also quite bullish due to low inventories and increased demand all over the world. Demand is projected to increase in Q2 of 2022 and beyond as the Chinese economy is expected to roar back to life especially as industrial production has been kept low to ensure that the Winter Olympics proceed with minimal pollution. 

SCCO is rated a B by the POWR Ratings which equates to a Buy. This isn’t surprising given SCCO’s attractive valuation, low-cost production, and strength in copper prices. The stock also has a B for Stability which fits SCCO’s continual improvements in operations that will lead to bigger margins and more earnings growth. 

RIO shares were trading at $77.87 per share on Monday morning, up $0.08 (+0.10%). Year-to-date, RIO has gained 16.33%, versus a -7.65% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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