Stimulated Stocks

 

While the debate rages over how targeted and timely the stimulus plan will ultimately be, we focus on targeting stocks that are timely for investors looking to cash in on the government’s spending boom.

 

By Peter Staas

 

With the US economy in the doldrums and unemployment numbers expanding as each week passes, few observers were surprised when the Obama administration’s economic stimulus plan allocated massive amounts of funding to a wide range of infrastructure projects.

 

Not only did the President trumpet such spending as a key to short- and long-term economic recovery, but infrastructure improvement also figured prominently in Franklin Delano Roosevelt’s New Deal programs and is a key component of China’s recent stimulus actions.

 

For years government and private spending on infrastructure has been insufficient to maintain and improve our current systems, from the aging electric grid to the nation’s deteriorating sewers, dams, bridges, roads and public transportation.

 

Although discussions about the necessity and benefits of such a program picked up steam in the wake of the Minnesota bridge collapse and other tragedies, this marks the first major effort to address a problem that the American Society of Civil Engineers requires some $2.2 trillion to bring up to speed.

 

Regardless of the Senate’s dickering over the economic recovery plan’s ultimate form, rest assured that infrastructure spending will remain a sizable component. Here’s a quick breakdown from the initial plan proposed by the Obama administration, along with a few stimulated stocks that could benefit down the line.  

 

Prospective investors should bear in mind that these disbursements won’t necessarily work their way into the economy immediately and remember that although these firms will likely compete for available contracts, there’s no guarantee that they’ll win. Still, there’s the potential that these picks might be timely and targeted even if, as some critics have suggested, the stimulus plan is not.

 

The initial plan delegated $30 billion to improving the nation’s highways; $31 billion for the renovation and construction of federal buildings and other public infrastructure; $19 billion for water treatment, flood control and like projects; and $10 billion to improve public transit and rail infrastructure.

 

Two companies that stand to benefit from these measures include URS Corp (NYSE: URS) and Granite Construction (NYSE: GVA).

 

The former boasts a longstanding reputation for success in completing a wide range for public infrastructure projects, from its involvement with the Hoover Dam in the 1930s to a more recent, $650 million upgrade of an Orange County freeway system and the construction and operation of a light rail system in New Jersey.

 

And transportation infrastructure and waste water management comprise only 18 percent of the company’s revenues; its other divisions offer significant exposure to the latest trends in power generation–namely nuclear energy and other alternatives–as well as military and hazardous waste cleanup.

 

This breadth of construction expertise has enabled the firm to amass an impressive book of business that totaled $33.1 billion at the end of the third quarter of 2008 and included a record backlog of $18 billion. All told, more than 50 percent of its revenues are derived from government-funded projects.

 

Granite Construction, originally recommended in our February 2008 issue by fund manager Jeff Auxier, provides construction services to both private and public contractors. Although the company has some exposure to site preparation and materials production for residential and commercial sectors–and downturns in this area have weighed on earnings growth–70 percent of its total revenue flows from public funding. This year highway construction contributed to 49 percent of its $2 billion in revenues, while projects involving the repair and construction of rapid transport, airports, bridges and dams accounted for 20 percent.

 

Energy infra structure is also addressed in the economic recovery plan, which includes funding for energy efficiency and the smart grid as well as measures that will spur development of renewable energy and carbon-reducing technology. A study commissioned by the Edison Electric Institute estimates that $1.7 trillion will need to be spent just to maintain our energy infrastructure–that’s not accounting for growing demand.

 

Potential beneficiaries of efforts to refurbish and improve the nation’s grid include Itron (NSDQ: ITRI), the leading worldwide supplier of automated meter reading systems and advanced metering infrastructure technologies. These meters provide utilities, consumers and regulators with real-time data on power consumption and distribution, enabling all parties to make intelligent energy decisions and are essential to the increasing automation and efficiency that are essential to building a smarter grid. Itron already holds a 50 percent share of the US metering market, and last year closed three deals worth a total of $960 million with CenterPoint Energy (NYSE: CNP), DTE Energy (NYSE: DTE) and San Diego Gas & Electric.

 

Regulated utility Duke Energy (NYSE: DUK) is another company poised to benefit from the proposed decoupling between energy usage and utilities’ profits, a measure that would stimulate the power companies’ spending on alternative energies. The company already has240 megawatts of wind power under construction and has been actively involved in investigating and promoting cutting edge smart grid technologies, including those related to plug-in hybrid vehicles.

 

Peter Staas is associate editor of Louis Rukeyser’s Wall Street.