Plans to inject money into rebuilding the country’s roads, bridges and other infrastructure could give businesses with links to the construction industry a solid foundation for growth.
President Joe Biden announced Thursday that a bipartisan deal has been reached on a $ 973 billion infrastructure plan. The clean plan calls for $ 559 billion in new spending over five years.
Companies such as Caterpillar, with its heavy machinery, and the building materials company Vulcan Materials could see years of additional activity as roads and bridges are rebuilt and buildings are modernized. Shares of both companies rose on Thursday after the bipartite deal struck. Small construction-related businesses also benefited: Dycom, which provides contractor services to construction companies, rose nearly 6%.
Infrastructure plans are long overdue, economists and business leaders said, as the country’s roads, bridges and other infrastructure age without any significant overhaul. The American Society of Civil Engineers gave the country’s roads a low rating in its 2021 report, saying 40% of the system is now in poor or poor condition. Bridges, schools, and much of the key infrastructure in the United States aren’t doing much better.
“From an economic growth standpoint, we see that the infrastructure deal is really boosting productivity,” said Ken Johnson, investment strategy analyst at the Wells Fargo Investment Institute.
The deal reached on Thursday still has some way to go. On the one hand, Biden said he would only sign the deal if a much larger $ 4 trillion reconciliation bill – which contained his other priorities – also arrived at his office.
Additionally, the compromise is less than the $ 2 trillion the president originally sought for infrastructure and focuses more on physical infrastructure and less on climate change efforts.
Citi expects nearly all of the heavy machinery manufacturers in its coverage group to benefit from government spending, but Caterpillar is likely to be the biggest winner.
“Not surprisingly to anyone who missed out on a major highway project, Caterpillar has strong market share in most categories of heavy construction equipment in North America,” according to a Citi report released last week.
As the industry and materials sectors receive a boost from the infrastructure deal, the broader stock market is focused on the overall economic recovery from the pandemic. “The general reopening of the economy and renewed economic growth after COVID-19 is the most likely driver” of the future of the market, said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance.
Peter Williams, economist at investment firm Evercore ISI, said the infrastructure package is unlikely to start boosting economic growth until 2023, as it takes time for large construction and repair projects to take off.
But in 2025 and 2026, the extra package would add a good percentage point to the economy’s growth rate, Williams estimates, and create up to around 775,000 jobs.
Michael Pugliese, economist at Wells Fargo Securities, said the infrastructure deal would likely have a modest impact on job creation and unemployment, but could help the US unemployment rate fall below 4 % a little earlier in 2023 than it would have otherwise.
The profits of many companies related to the construction or industrial sector are already expected to gain ground in the coming years as the economy recovers.
Any spending measure spread over years will help to secure and boost this growth through project contracts and orders for supplies and equipment.
Manufacturers of cranes, bulldozers and other machinery are still only part of the picture.
Companies that manufacture asphalt, concrete, and other road and construction materials are well positioned for future infrastructure spending. Vulcan Materials and Martin Marietta Materials are among the largest manufacturers of aggregates in the United States
“Remember that in any definition of infrastructure, if it is new construction, the aggregates will be in the foundation,” J. Thomas Hill, president and CEO of Vulcan Materials said at a conference call with investors. “So that will help us, whether it’s roads and bridges or other forms of infrastructure. “
But don’t overlook small construction companies, either. Shares of Watsonville, Calif., Granite Construction jumped nearly 5% on Thursday and posted another 4% gain on Friday. The company has a market value of just under $ 2 billion.
Paint and coatings manufacturers like Sherwin-Williams and PPG Industries are also in a good position to benefit from any increase in government spending. Bridges need paint and other coatings to withstand the elements, while roads and buildings also need a significant amount of paint.