Infrastructure spending has been the topic of many investment discussions recently. There is rare bipartisan agreement that there is a need to upgrade traditional infrastructure like roads, bridges, ports, and airports. But politics being what it is, the devil is in the details as to whether there will agreement on a large spending package.
But regardless of the politics, there is a need that will be addressed. States and local governments are already spending money where it’s needed, and there are companies that are benefiting from those needs. North America’s largest steelmaker Nucor (NYSE:NUE) is positioned to profit from infrastructure improvements, as is construction equipment supplier United Rentals (NYSE:URI).
And though there is debate on how to define infrastructure, the power grid is undoubtedly part of it. Rolling blackouts in California and the severe winter storm in Texas this year have Americans wanting security in the the power supply. Combining that desire with the growing push toward renewable energy has residential and commercial solar company SunPower (NASDAQ:SPWR) also in a good position to benefit. All three should be on investors’ radar for new investments.
Getting the job done
United Rentals has successfully negotiated its business through the disruptions caused by the pandemic. The rental equipment company depends heavily on construction projects, and its total revenue decreased almost 9% in 2020 compared to 2019. But as the recovery takes hold, management anticipates revenue growth of more than 8% and adjusted EBITDA of $4.2 billion for 2021, representing a 7% increase over 2020.
United Rentals is North America’s market share leader in its space and has end-market exposure beyond just infrastructure projects. Though infrastructure and non-residential construction made up half of 2020 revenue, the company also has exposure to markets including oil and gas, chemicals, wood products, metals, and the power industry. Growing infrastructure spending would have a trickle-down effect on many of those industries, further boosting United’s business.
Even with United Rental shares up 46% year-to-date, the stock is still trading at a forward price-to-earnings (P/E) ratio of about 16, according to data by YCharts. Between investments made by businesses during an economic recovery and inevitable spending on infrastructure maintenance and improvements, that still isn’t a rich multiple to pay for a company in a position to benefit from both.
An unstoppable trend
In its recent 2021 renewable energy market update, the International Energy Agency (IEA) said that renewables were the only energy source for which demand increased in 2020 despite the pandemic. The agency said the growth in solar capacity “will continue to break records” with annual additions of solar generation 50% higher than pre-pandemic levels by next year.
That growth is supported domestically by the current administration, which seeks to help fund it through the proposed infrastructure bill. Several areas of Biden’s plan focus on shifting the country to the use of greener energy over the next eight years.
Residential, commercial, and solar storage solutions provider SunPower is in a position to benefit from the momentum in the trend toward growing renewables. While total revenue only grew 5.5% year over year in the recently reported 2021 first quarter, its Commercial and Industrial Solutions segment grew revenue by more than 20%, and generation capacity by 34%.
For the full year 2021, the company sees revenue growing about 35%, and estimates 2022 adjusted EBITDA growth of more than 40%. In summary, the company said in its earnings release it will continue to benefit from “strong industry tailwinds, further anticipated federal policy support as well increased demand for its residential and commercial storage solutions.”
The company reported margins from continuing operations of 16.3% in the first quarter, a jump from 10% in the prior-year period. SunPower shares are down 10% so far in 2021, but are more than 55% below recent highs reached in January. Now should be a good time for investors to ride what looks to be an unstoppable trend in solar growth.
Riding the boom
Leading North American steelmaker Nucor is in a prime position to benefit from the economic recovery, and potentially any infrastructure spending. The company reported record quarterly earnings in the first quarter, and said it expects to break that record again in second quarter 2021 earnings. A combination of pent-up demand, low customer inventories from pandemic buying, and the boom in commodity prices are all contributing to its recent success. The company is also working to benefit from the trend in solar energy growth.
Steel price futures as measured by Hot-Rolled Coil Steel (CRU) continue to hold record highs at about $1,650 per ton. That’s about 225% higher than just one year ago. While pricing will eventually drop either from competitive imports or users looking for alternate materials, steel companies like Nucor are quoting deliveries out about three months due to high demand.
The company should give investors a financial update later this month, and since there is visibility out several months from the order book, management will likely comment that the outlook for the third quarter will be a continuation of the record business levels it is currently seeing.
Even though the stock has doubled already in 2021, profits should conservatively be greater than $3.5 billion for the year, given current pricing and backlogs. At a P/E ratio of only 10, that would still leave shares with about 10% upside. If steel pricing and demand holds through the fourth quarter, assuming the same P/E, the stock could still move another 25%. Now would be a good time to get shares that also have a reliable dividend that yields 1.5%.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.