Kristoffer Inton: Infrastructure was one of few topics to receive bipartisan applause during President Trump’s State of the Union address, suggesting hope for increased U.S. infrastructure funding. However, current market valuations of heavy building materials companies imply that more money may not be coming. In our view, this outlook is short-sighted and overlooks a few important factors.
In the short term, the FAST Act, which was passed in 2015 under President Obama, should continue to pay for very large infrastructure spending outlays over the next few fiscal years.
Additionally, from a longer-term perspective, the midterm elections boosted our optimism for better funding. A split Congress, favorable results from specific governors’ elections, and supportive referendums boosted the likelihood of higher infrastructure funding in the years to come. We believe many state and local governments should continue to boost their own funding mechanisms.
Finally, with the midterm elections completed and 2020 elections looming ahead, the probability of a plan passing in the next two years is now far higher. Reelection campaigns have yet to ramp up, and candidates will look to bolster reelection campaigns with progress on causes with bipartisan support like infrastructure.
For investors interested in exposure to increased U.S. infrastructure construction, we see Summit Materials, U.S. Concrete, and best-idea Martin Marietta as undervalued. Martin Marietta is currently our top pick. The company’s aggregates and cement operations give investors a high degree of infrastructure exposure and will likely benefit from operating leverage as production volumes rise. Additionally, the company offers an attractive footprint focused on states with both high growth prospects and high repair needs.