America’s manufacturing industry, after waning for decades, is adjusting to a world that has ditched globalization for reshoring – bringing production back home. That has set the stage for an infrastructure building boom, much of it backed by the U.S. government.
“The U.S. is in the early innings of reindustrialization, a multi-decade investment opportunity that will restore growth to the U.S. industrial economy following 20-plus years of stagnation,” Morgan Stanley research analyst Chris Snyder wrote in a recent report.
The big infrastructure buildout is worth paying attention to because it encompasses a broad range of businesses in a number of sectors. Many infrastructure companies are old line industrials, including businesses that make heavy machinery or parts for industrial production. Other companies provide services to such businesses or transport goods or people. Also included under the infrastructure tent are companies in the materials, energy and utilities sectors. Even some tech firms are considered infrastructure plays these days.
Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Save up to 74%
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
It’s the dawn of a new era for infrastructure spending
America’s manufacturing industry is beginning to reassert itself. The dominance of U.S. industrial firms began to decline when China joined the World Trade Organization in 2001. Back then, American industrial companies made up roughly 12% of the market value of the S&P 500.
But cheap labor abroad and a focus on globalization helped to undermine the sector, as companies moved manufacturing overseas. (At the same time, the soaring fortunes of technology-related firms shifted market leadership in their direction.) Today, industrial stocks represent just over 8.5% of the S&P 500.
But the tide is turning. The COVID-19 pandemic highlighted the downsides of operating some businesses on an international scale. Think back to the floating traffic jam of 50 container ships in the Pacific Ocean waiting to dock in California in 2021. Such supply-chain snafus increasingly spurred domestic companies to bring production back to the U.S., and some foreign firms are building manufacturing plants in the U.S. to be closer to their American customers.
As the shift got under way, it became abundantly clear that the country’s aging infrastructure, after decades of underinvestment, badly needed an upgrade, from the power grid to railways, bridges, highways and airports. Politicians on both sides of the political aisle agreed. Between 2021 and the end of 2022, lawmakers decided to allocate nearly $2 trillion in federal funding and other incentives to restore manufacturing in America and upgrade the country’s infrastructure through a combination of three acts: the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act.
“This massive investment could drive long-term growth for the industrials sector for years to come,” says Fidelity’s David Wagner, who runs the firm’s Select Industrials Portfolio.
More than 60,000 projects have been announced as part of the $1.2 trillion Infrastructure Investment and Jobs Act, including 10,000 bridge projects, 175,000 miles of roadway repairs and 1,100 airport modernization projects, among other things.
Nearly $60 million, for instance, will pay for a seventh runway, as well as other upgrades, at Denver International Airport. And $30 billion of the $280 billion CHIPS and Science Act has been earmarked to help fund 23 projects, including 16 new semiconductor manufacturing facilities in 15 states so far. Two years ago, the U.S. produced none of the world’s most advanced chips, according to the government. By 2032, the country will produce nearly 30% of the global supply of leading-edge chips.
Indeed, an unprecedented amount of spending is being “funneled into a relatively small area of the U.S. economy,” says Yung-Yu Ma, chief investment officer of BMO Wealth Management, who has been recommending that investors allocate a bigger percentage of their portfolio to U.S. infrastructure since early 2023. “These trends are strong and durable,” he says.
There’s room for infrastructure stocks to run
Judging by the soaring returns in some bellwether stocks, the industrial renaissance is well underway. Industrial giants such as Caterpillar (CAT), GE Aerospace (GE) and RTX (RTX) have each posted gains of more than 50% over the past 12 months – ahead of the 34% climb in the S&P 500.
There’s even an artificial intelligence (AI) angle to some infrastructure stocks that is fueling share-price increases. Mounting demand for data centers to handle AI tasks, for instance, has pushed shares in Digital Realty Trust (DLR), a real estate investment trust (REIT) that specializes in data centers, up 45% over the past 12 months. The stock now trades at a five-year-high price-to-earnings (P/E) ratio based on estimated earnings for the year ahead.
But it’s not too late for investors to cash in on the infrastructure rally. For starters, only a relatively small portion – roughly 20% – of the total money set aside in the spending bills has been spent so far. And these projects take time to get up and running. “We’re in the middle of the third inning of the infrastructure trend. There’s still a good way to go,” Ma says.
The best infrastructure stocks to buy
Given the breadth of spending that the infrastructure bills cover, there are many ways for investors to cash in on the industrial renaissance. “You’re seeing this wide array of project announcements – in the energy sector, in commercial infrastructure, public infrastructure, utilities,” says Fidelity’s Wagner. “It’s multifaceted, which is different than other up cycles in industrials. It’s not a play on one end market or one subindustry cycle.”
We’ve highlighted seven companies, in a variety of industries, that we expect to benefit from infrastructure spending. Be patient with these investments. Some may win over the near term, but most may take time to pay off.
“We’re not building these factories in days or months. They’re going to take quarters and years,” says Jason Adams, who runs T. Rowe Price Global Industrials fund. “There’s still a lot of buildout to go.” Returns and data for the investments below are through November 30, unless otherwise noted.
Aecom
(Image credit: Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)
Big construction projects need to be managed efficiently, and that’s what Aecom (ACM) does. The infrastructure professional-services firm plays the role of maestro over the life of a building project. It also offers advisory, planning, design and engineering services – and more.
“Aecom is a high-quality, low-risk way to play secular growth in global infrastructure,” says Truist Securities analyst Jamie Cook, who recommends the large-cap stock.
New contracts at home and abroad are flowing in. Roughly three-fourths of the company’s business is stateside. In October, Aecom won a Texas Department of Transportation contract to provide design services for a segment of Highway I-45 in Houston. And in September, it agreed to manage the construction of a new terminal at San Diego International Airport, among other improvement projects there.
Another fourth of Aecom’s business is overseas, and last fall it won separate contracts for services in water-supply programs in South Africa and the U.K., as well as a rapid-transport project in Bangkok to design tunnels and tunnel ventilation systems, among other things.
“We expect growing demand for environmental, road and water projects to provide the company’s design and consulting service with a stable source of revenue,” says Argus Research analyst John Staszak, who rates the stock a Buy.
The recent contract wins have helped boost shares 28% since the start of 2024. Yet the stock is still relatively inexpensive. It trades at 23 times expected 2025 earnings – a discount to other engineering and research-and-development services firms, which trade at a median P/E of 26, according to Zacks Investment Research.
Eaton
(Image credit: Raymond Boyd/Getty Images)
Electricity demand is expected to soar thanks to the use of artificial intelligence, reshoring efforts, and the growing adoption of electric vehicles and renewable energy.
“We expect electricity demand to double between now and 2050,” says Bernstein Research analyst Chad Dillard. To put that in perspective, over the next five years, electricity demand could increase at an average annual pace of 1.7%, which is far faster than the 0.4% annual growth rate in demand over the past decade.
To keep up, utilities must upgrade their electrical infrastructure. Spending on electrical equipment could rise by as much as 3% to 7% per year, on average. As a result, electrical-equipment manufacturers such as Eaton (ETN) are poised to deliver double-digit earnings growth, says Dillard.
Eaton makes electrical systems and components for end users in multiple sectors and industries, including utilities, manufacturing, commercial and residential property, automakers, aviation, and technology. The company’s broad array of customers makes Eaton a beneficiary of several megatrends, including the upgrade of America’s power grid as well as the buildout of data centers. An aging airplane fleet amid a rise in air-travel demand is boosting orders for Eaton’s aerospace equipment.
Shares have climbed 67% over the past 12 months, so don’t expect a similar pop in 2025. But there’s still upside left, says UBS Securities analyst Amit Mehrotra, whose 12-month price target for the...
Read More Details
Finally We wish PressBee provided you with enough information of ( Stocks and Funds for the Infrastructure Building Boom )
Also on site :