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Wall St Weekahead: Investors green-light infrastructure trade, but expect road bumps

Reuters  |  NEW YORK 

By Lewis Krauskopf

NEW YORK (Reuters) - Volatility awaits of U.S. construction, engineering, and other companies tied to spending, but could be poised for gains if they weather a few bumps.

The are set to be in focus in the coming weeks as seeks legislation geared at overhauling the country's aging roads, bridges and other infrastructure, fresh off passage of a tax reform bill by his

A group of U.S. senators met with administration officials this week to discuss legislation to spend $1 trillion to improve

An infusion of federal spending is expected to boost infrastructure-sensitive companies, but the could see a rocky performance as a bill maneuvers through and details of any legislation emerge.

Improving the country's infrastructure, which last year was given a failing grade by the American Society of Civil Engineers, has broad appeal.

Still, while some Democrats want such a bill, political differences may undermine the effort and affect the amount of private sector investment.

Regardless of federal legislation, however, investors and analysts see a favorable climate for such stocks, including the need for an upgrade of national infrastructure, an expected spike in earnings for many companies this year, and positive economic trends that support investment in big projects.

"There is money flowing in this area even if you don't get the big federal one," said Walter Todd, at in Greenwood, "That would just be icing on the cake if that happened and would really flow through to these "


Todd says his firm is overweight infrastructure-related names, including owning Granite Construction Inc, companies and and company Nucor Corp.

Those and other construction-related names soared in the immediate aftermath of Trump's November 2016 election, spurred by his campaign vow to spend on

But while the benchmark stock index has been on a steady ascent since Trump's election, construction-related in particular have endured a rollercoaster ride, whipsawed in part last year by uncertainty over Trump's agenda.

Even with outsized gains over the past two months, the trade has posted lukewarm returns since just after Trump's win.

For example, since early December 2016, while the has surged more than 22 percent, the construction and engineering index has climbed 9 percent, and the index and the construction materials group have each climbed about 5 percent.

"From a year-over-year standpoint, a lot of these names have not really done anything," Todd said.

At this relatively late point in the economic recovery, customers should be more comfortable making capital spending decisions on projects, according to analysts.


Engineering and construction companies "are a late-cycle industrial play, so we have just started to see the juice kick in for a lot of them," said Tahira Afzal, at

"Even without an stimulus or bill, the next two years should be years in which the sector outperforms."

Earnings for engineering and construction (E&C) companies overall are projected to grow 27 percent in 2018, while companies could see a 32 percent jump, according to data. That compares to a estimated 13.9 percent increase for the S&P 500, according to I/B/E/S.

"The market is trading off of near-record earnings and the E&C companies aren't at those record earnings yet as a group," said John Rogers, founder of independent engineering and construction consulting firm JBR Advisory, LLC in Portland,

Some optimism over an bill may already be reflected in stock values. For example, and have climbed 28 percent and 18 percent respectively, since the start of November, while have jumped more than 50 percent.

While other factors could be fueling the gains, such as the tax-cut legislation or global economic momentum, these could pull back if the federal package disappoints.

"You really have to take a longer-term perspective and just realize that if something does happen in there will be a lot of two-steps-forward, one-step-back," said Eric Marshall, at Dallas-based Hodges Capital Management, which owns as well as equipment rental company and contractor Primoris Services Corp.

"You can make a that there is pent-up demand for things like waterworks and roads and bridges and highways," Marshall said.

(Editing by and Bernadette Baum)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, January 12 2018. 11:36 IST