Hit the Road
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August is the top travel month in the US and it always puts our infrastructure under the spotlight. Below are some stars that are getting set to shine.
It doesn't matter where you live or where you traveled--from Walker Point, Maine to Warrenton, Washington--the American roadways have become one big pothole. Not that you would do any damage to your car, since most of us rarely get out of second gear.
The dream of being able to move freely from coast to coast has now become a nightmare for drivers. With the basic structure of the Interstate Highway System largely unchanged since "I like Ike" buttons were all the rage, we just don't have the capabilities to move all of us and all of our stuff anymore.
It comes down to growth--we're still expanding our population, and producing more and more things that have to be moved around. We've been following the relationship between the expanding amount of passenger and freight transportation for some time now and we know that the growth of our economy moves in nearly lock step with the expansion of how many folks and how much stuff moves around and through the nation.
In the graph xx, we show the growth of transportation in the US. Data from the US Department of Transportation (DOT) shows the consistent expansion. Going back only 15 years, the combination of passenger traffic and freight continues to grow at an average annual rate of around 2.3 percent.
That's not much less than the overall growth in our domestic product, which on a chain-weighted basis has expanded for the same period of time at an average annual rate of not much more than 2.9 percent.
It's simple: If we can't move more people and products, then we can't expand the economy and the market won't be a happy place for investors.
Move It Or Lose It
DOT's Bureau of Transportation Statistics gives us even more evidence that our roadways are a big limiting factor for further economic growth: The volume of freight alone surged to more than 42 million tons daily, more during crucial shipping seasons such as pre-Christmas stocking for distributors and retailers.
The amount of freight is expanding more than 16 percent annually since the late 1990s, amounting to nearly $30 billion on a daily basis. But the clincher is that nearly two-thirds of all the freight moves on the nation's roadways.
Product-laden trucks have to fit on increasingly congested roads, competing not only with each other for space, but also with the rest of us just trying to get to the office, a ballgame or to a weekend retreat.
But all of us just aren't moving. This is where we've drawn from studies done by the Texas Transportation Institute (TTI) showing the limits of our roadways.
TTI has determined that we waste more than 46 hours each year sitting in traffic, much more if you're tortured enough to be around key megalopolises such as Washington, DC, New York, Los Angeles and others. That congestion burns up some 6 billion gallons of gas and costs our economy $60 billion in lost productivity. And this was before oil soared through the $60 a barrel mark.
This is why Congress finally put together a plan to at least start to deal with the troubles. The recently passed Highway Bill has been in the works for years. And after plenty of squabbling and backroom negotiating, Congress got a bill done that will spend beyond $286 billion to shore up some of the larger vertebrae of our transportation backbone.
Sure, there's more pork in the bill than the entire population of pigs in the nation, but that's politics. So we're going to make the best of it--at least some of those hundreds of billions will be spent to fix and expand the roads and bridges.
We also follow up on many of our favorite companies as well as some new ones that will be cashing in on the fat and the real meat of one of the biggest boons to road crews since Ike laid the first bit of concrete decades ago.
Cashing In On Concrete
There are four industry groups that should be key beneficiaries of the highway legislation and its aftermath. It starts with the purveyors of the materials from which roadways are made.
It continues with the hardware suppliers—sign makers, guardrail builders, etc.--that make the highways functional and safer. Then it's the companies that actually build the roads, followed by the corporations that will move more stuff on the new or improved roadways.
When building or fixing a freeway, you need a lot of materials to form the bedrock to attach the final coat of concrete or macadam. And for us, there are two companies that lead this sector.
The first is Martin Marietta Materials. This company provides a lot of the base materials for the roads and has been doing so for a number of years. Sales have been expanding below a 5 percent pace even with a dearth of big federally funded projects.
Even during the leaner times, the company has been profitable with solid margins of near 20 percent and impressive returns on investor's equity exceeding 11 percent. Martin Materials is a buy up to 80.
The second is Lafarge, which supplies the core of what it takes to lay more concrete. Like Martin Marietta, Lafarge has been puttering along with modest gains during the last year or so but doing so with rising profitability and improved margins. Lafarge is a good buy up to 80.
The next group supply all of the guardrails, Jersey barriers, retaining walls and most of the other stuff that has to be put up alongside and around roads and bridges that are being maintained or built. LB Foster has been our leading pick for some time now.
The company has had similar modest sales gains but that's changing. The market is already beginning to figure it out and the stock has begun to climb. But at a huge 63 percent discount to sales, LB Foster is still cheap and should fare well for some time; buy and hold it up to 16.
Then we need the contractors to fix and build all of our new roads, bridges and interchanges. We have three that we've been following; two are well known and one is the up-and-comer.
Fluor Corp and Ashland have continued to earn bigger and more profitable contracts from the feds as well as state and local authorities. And now their clients have all of those additional billions to spend.
Both of these companies have been sitting on the sideline for a while. But both have continued to be profitable for years, even during the recent lean years. Both significantly outperformed the general stock market with average annual gains during the last five years of more than 13 percent for Flour and more than 23 percent for Ashland.
Yet, despite their improving fortunes in the market even before the big new contracts--both trade at huge double-digit discounts to their trailing and improving revenues. Fluor is a buy up to 66 with Ashland a similar great buy up to 70.
The third, Sterling Construction, is much smaller but just as savvy when it comes to getting the road contracts. The company has boosted sales by more than half in the last year alone, even before the transportation bill bucks.
This has drawn buyers in droves, driving the stock up nearly four times since we first recommended it around a year ago. We've recommended taking money off the table but now with federal dollars coming, Sterling would make for a buy on dips under 25.
Last, we might call truckers a few choice names while we race them down the highways but as investors, we've always been fans. We made a nice gain and collected some nice dividends from former Growth Portfolio member Werner Enterprises.
And now we have a new Canadian transporter--TransForce. The company moves stuff throughout North America and does so at an increasing pace. And with newer roads opening up, this big dividend payer will be rolling even more profitably. TransForce is a buy up to 21.
Complementing our Northern pick is its ubiquitous US counterpart, JB Hunt. The company moves nearly everything of commerce to and from almost every corner of the country and does so with increasing profits. And while its dividend isn't as generous as Transforce, JB Hunt is a buy up to 22.50.
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