Profiting from Biden’s infrastructure plan

Enriched Investing’s Margaret Samuel picks four stocks that can provide services and products required by US President Biden’s infrastructure plans.

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Margaret Samuel picks four companies that can provide infrastructure services and products needed in US President Joe Biden’s massive infrastructure and climate spending plan.

US President Joe Biden’s introduction of an infrastructure and climate plan that will target crumbling infrastructure in the US and that will invest about 1 per cent of GDP per year for eight years totalling about $2 trillion this decade, may create an opportunity for public company investment.

Here are four companies that can provide the infrastructure services and products required by the first leg of Mr. Biden’s plan.

Primoris Services Corporation (NASDAQ—PRIM)

Through its subsidiaries, Primoris operates three specialty construction and related segments. First, Utilities installs and maintains new and existing natural gas utility distribution systems, provides electric utility transmission services, and offers substation and pipeline integrity services. Second, Energy provides engineering, procurement and construction, retrofits, upgrades, repairs, outages and maintenance services, and specializes in highway, bridge and airport runway construction, demolition and site work. Third, Pipeline Services constructs and maintains pipelines, and offers pipeline facility and integrity services.

Primoris is ranked in the top 10 per cent of the prestigious Top 600 Specialty Contractors List by Engineering News-Record (widely known as ENR). Based in Dallas, Texas, with roots that go back to the 1960 founding of ARB, Inc., a pipeline construction company, Primoris has grown organically and through acquisitions to become one of the largest specialty contractors in the United States.

The company’s diverse base of customers includes blue-chip, well-tenured major public utilities; telecommunications providers; petrochemical, power, midstream, and engineering companies; and state departments of transportation. Master Service Agreements (MSAs), generally multi-year agreements, govern most of its services, with the remainder under contracts for specific construction or installation projects.

While the stock’s price has risen steadily in the last year and is making new highs, the company performed well in 2020 despite the business and personal impacts of the COVID-19 pandemic. Primoris’ dividend yield of 0.6 per cent appears sustainable with a conservative payout ratio of 11.11 per cent. Its 2020 revenue was a record $3.5 billion and it generated a record $2.16 fully diluted 2020 earnings per share. Primoris enters 2021 with a solid backlog of $2.78 billion.

Nucor Corporation (NYSE—NUE)

An attractive ‘picks and shovels’ play, Nucor Corporation has manufactured steel and steel products since 1958 and is now a leading domestic provider of steel products.

Nucor’s Steel Mills segment (representing 60 per cent of the company’s sales to external customers in 2020) produces and distributes sheet, plate, structural and bar steel. Second, the Steel Products segment produces steel joists and joist girders, steel deck, fabricated concrete reinforcing steel and cold finished steel. Third, the Raw Materials segment produces direct reduced iron (DRI) for use in its steel mills, supplies ferro-alloys, processes ferrous and nonferrous metals, and brokers metals, pig iron, hot briquetted iron (HBI) and DRI. Using approximately 17.8 million tons of scrap steel in 2020 to produce steel and steel products, Nucor is North America’s largest recycler.

Nucor has a diverse customer base, with its largest customer in 2020 representing less than 5 per cent of sales. While most of Nucor’s operating facilities and customers are located throughout the United States and Mexico, it also operates in South America, Europe and the Middle East.

Focusing on lowering costs, diversifying its operations, and investing approximately $4.24 billion in capital expenditures and acquisitions over the last three years, Nucor’s highest capital allocation priority is to invest in its business for profitable long-term growth.

Nucor’s second capital allocation priority is to return at least 40 per cent of net income to shareholders through cash dividends and share repurchases. Nucor paid shareholders dividends yielding about 3.14 per cent totalling $1.47 billion (19 per cent of cash flows) in the past three years. Non- Executive Chairman John H. Walker reported in the 2020 Annual Report that “Nucor has increased [its] regular cash dividend for 48 consecutive years—every year since the company first began paying dividends in 1973.” Also, repurchasing $39.5 million shares in 2020, $298.5 million in 2019 and $854.0 million in 2018, Nucor returned approximately 61 per cent of its net income to shareholders over the last three years.

Notwithstanding a parabolic share price increase in the last year and decreased earnings per share since 2018, cash provided by operations has trended upward since 2016. Nucor ended 2020 with $3.16 billion of cash and equivalents, and a relatively strong credit rating of (Baa1/A-) with stable outlooks at Moody’s and Standard & Poor’s.

President and CEO of Nucor, Leon J. Topalian, stated in the 2020 annual report that Nucor will work with President Biden to pass the infrastructure spending bill: “With approximately 50 per cent of our steel used in [sic] construction sector, there is no company more poised and readier to meet the needs of rebuilding our country than Nucor.”

Stantec Inc. (TSX—STN; NYSE—STN)

Stantec’s $5.7 billion market capitalization makes it a top-tier infrastructure company with locations around the world and net 2020 revenue of $3.684 billion. Providing design, engineering, construction management and inspection services for roadways, rail lines, public transit, bridges and community development, Stantec generated 29 per cent of its revenue in Canada, and 18 per cent and 53 per cent of its revenue globally, and in the US, respectively.

Serving both public and private sector clients, Stantec operates through three Consulting Service segments: Canada, United States and Global. As of 2020, Stantec has five specialized business operating units: Infrastructure (generating $1.024 billion (28 per cent of revenue)), Buildings (generating $788 billion (21 per cent of revenue)), Water (generating $744 million (21 per cent of revenue)), Environmental Services (generating $559 million (15 per cent of revenue)), and Energy & Resources (generating $539 million (15 per cent of revenue)).

Both net debt to adjusted EBITDA (.7x at December 31, 2020) and Days Sales Outstanding (75 days at December 31, 2020) are better than Stantec has targeted. Founded as a one-person firm by Dr. Don Stanley in 1954 in Edmonton, Stantec is now a 22,000 employee-strong company.

As a sustainability leader, including being a signatory to the UN Global Compact, Stantec is a defensive investment, generating uninterrupted profitability for 65 years since 1954. Stantec ended 2020 with a 7.6 per cent compound annual growth rate of 10-year adjusted diluted earnings per share. It has solid visibility with a backlog of $4.4 billion that grew organically by 3.1 per cent in 2020.

In the fourth quarter of 2020, Stantec generated $440 million free cash flow, repurchased $80 million of shares, closed a $300 million bond offering, maintained an $800 million revolving credit facility largely undrawn, and increased its dividend by 6.5 per cent.

President and CEO Gord Johnston and Chair Douglas K. Ammerman stated that “With a strong balance sheet, an enviable backlog, and a healthy acquisition pipeline, we are ready to deliver continued growth in 2021.” With more than 50 per cent exposure to the US market, Stantec is well positioned to benefit from infrastructure tailwinds that could be created by the Biden Infrastructure and Climate Plan.

Trimble Inc. (NASDAQ—TRMB)

Founded in 1978, Trimble developed GPS technologies in its early days and has evolved to combine hardware and software in artificial intelligence (AI) solutions integrating real-time positioning through a number of technologies, including the Global Positioning System (GPS) and other Global Navigation Satellite Systems (GNSS), with wireless communications.

For example, one of Trimble’s latest innovations is a 3D-paving-control platform. On February 3, 2021, Trimble announced the global availability of its Roadworks 3D Paving Control Platform for Asphalt Pavers, asserting that “Trimble Roadworks allows the transfer of 3D designs from the office to the machine via the cloud so that the operator is always using the latest design” which can minimize asphalt usage, and reduce waste and overruns to improve paving productivity. Trimble solutions such as these and others that automatically guide construction equipment, remotely diagnose machines, and deliver real-time job-site updates, would help rebuild US infrastructure efficiently.

Sold in more than 150 countries to customers including state, federal and municipal governments, Trimble collaborates with major companies such as Caterpillar, Nikon and Microsoft to develop products and solutions that are deployed across four business segments: Building and Infrastructure (39 per cent of revenue) serving architecture, engineering, construction, and operations and maintenance customers; Geo-spatial (21 per cent of revenue) for surveying, engineering and government clients; Resource and Utilities (2 per cent of revenue) serving agriculture, forestry and utilities customers; and Transportation (20 per cent of revenue) for long-haul trucking and freight shipper clients. Fiscal 2020 revenue was generated in North America (52 per cent), Europe (29 per cent), Asia Pacific (13 per cent) and the rest of the world (6 per cent). No customer accounted for 10 per cent or more of revenue.

Total 2020 revenue of $3.1 billion decreased by $116.6 million or 4 per cent year-over-year, partly due to COVID-19, but increased compared to 2018. While Trimble does not pay a dividend, preferring to invest in its business, 2020 Operating Income increased by $43.9 million or 12 per cent, and gross margin increased to 55.8 per cent. Trimble’s revenue visibility is improving as it shifts more toward software, recurring, and services (58 per cent of revenue).

With debt to equity of less than 50 per cent, 2020 interest expense was less than 12 per cent of, as President and CEO Robert Painter stated, “a record $672 million of operating cash flow”. On February 10, 2021, he also highlighted that Trimble enters 2021 “with increased conviction in our ability to fulfill our mission to transform the way the world works.” This aligns with President Biden’s Infrastructure and Climate Plan and could make Trimble an attractive partner.

Depending on an investor’s objectives, these four firms may be candidates to be purchased or held. Their stock prices are all making new highs, which may be a reason to wait for a correction before initiating a position. On the other hand, stock prices that make new highs may do so for a reason. The potential for Congress to pass the President’s Plan may be this reason. An approach worth considering may be to purchase half a position now, and to complete the full position or exit later.

Margaret Samuel, MBA, LL.B., CFA is President, CEO and Portfolio Manager of Enriched Investing Incorporated. She can be contacted at info@enrichedinvesting.com.

This is an edited version of an article that was originally published for subscribers in the April 2021, Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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