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Potential Stimulus Package Plays

These companies are expected to benefit from a boost in infrastructure spending.

Patricia Oey, 02/03/2009

Which companies are most likely to benefit from infrastructure spending as part of the proposed stimulus package? Over the last week, both the U.S. House of Representatives and the Senate released budget outlines for the proposed $825 billion federal stimulus package. Broadly speaking, the two outlines are similar: $40 billion for transportation infrastructure, which includes roadways, bridges, public transportation, and airports; $30 billion for renewable energy projects and energy-efficiency initiatives; and $15 billion to upgrade the nation's water infrastructure, which includes drinking and waste-water systems, as well as flood-protection projects.

One company superbly exposed to a major piece of the stimulus package (transportation infrastructure) is Granite Construction GVA, a vertically integrated, heavy civil construction company. Granite has a long history of completing large-scale roadway, airport, rapid-transit, and dam projects, and these types of projects account for almost 70% of Granite's total revenue. Granite is also a large producer of construction materials such as aggregates, asphalt, and concrete (all of which are heavily used for transportation infrastructure projects). The company uses about 40% for its own construction projects, and the remainder is sold to external parties. This vertical integration allows Granite to have more cost visibility, which is a competitive advantage, especially during the contract bidding process.

Along the same lines, we also recommend Martin Marietta Materials MLM, a leading provider of construction aggregates, primarily along the southern portion of the United States. While about 50% of Martin Marietta's business is exposed to the ongoing slowdown in residential and nonresidential construction, the remaining 50% of its business services infrastructure projects, which includes roads, bridges, and railways.

Meanwhile, AECOM Technology Corporation ACM is likely to be an early beneficiary of the stimulus. This company provides primarily front-end services, such as engineering, design, and construction management. AECOM's largest end market by revenue is transportation infrastructure (accounting for almost 30% of total revenue), and its area of expertise includes mass transit, roadways, airports, and water facilities. AECOM also has an energy practice, which includes the design and engineering of power transmission and distribution, renewable energy, energy efficiency, sustainable design, and thermal power generation projects. AECOM recently bolstered its public water and environmental practice with the purchase of Earth Tech, an engineering and design subsidiary of Tyco International, Ltd. TYC.

As a major government contractor, URS Corporation URS is well-positioned to benefit from a boost in federal infrastructure spending. Its infrastructure segment, which accounts for about 20% of revenues, includes mostly transportation and water projects. URS also has a government segment, which provides environmental clean-up services, and a power segment, which includes an alternative energy practice. Both of these areas are expected to receive funds from the stimulus package. While engineering and construction competitors such as Jacobs Engineering Group JEC and Fluor Corporation FLR also stand to benefit from additional infrastructure spending, these two companies have smaller infrastructure practices, relative to URS. Infrastructure-related revenue also represents a smaller portion of overall revenues at Jacobs and Fluor.PAGEBREAK

EMCOR Group, Inc. EME, a provider of mechanical and electrical construction services for buildings and facilities, stands to benefit from a planned $6 billion in spending to improve energy efficiency and energy conservation of federal buildings. The company is currently the second-largest facilities service provider to the federal government in Washington, D.C. EMCOR also provides electrical and mechanical construction services for transportation projects, which includes computerized highway traffic control systems, and signal and communication systems for mass transit systems.

While we are optimistic that these companies will benefit from the federal stimulus package, we caution that spending could be slower than expected. The Congressional Budget Office recently released a report stating that out of the $355 billion allocated to infrastructure and other discretionary programs, only about $26 billion would be spent in this current fiscal year, and $110 billion would be spent by the end of 2010. In addition, we also highlight that profits from these government contracts could be lower than expected. If private-sector spending on construction slows significantly, we could see many bidders for these government contracts.

Patricia Oey is a stock analyst with Morningstar.

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