Adding two infrastructure beneficiaries to our Contender List
In recent editions of the Monday Morning Kickoff and The Weekly Wrap, we’ve shared data showing non-residential construction has seen an uptick following the powerful hurricanes in the second half of 2017 that hit Texas and Florida. At the same time, there is growing talk in Washington that later this month President Trump will unveil his rebuilding U.S. infrastructure framework ahead of his Jan. 30 State of the Union address. While there are several questions that would need to be ironed out — things such as how the country will pay for that rebuilding effort given the recent tax cut and $20.6 trillion dollar national debt (roughly 105% of GDP) at a time when China is getting its back up about future purchases of U.S. Treasuries — there is little question the country’s infrastructure needs to be rebuilt. I see this very much in line with the “pain point” investing strategy we use here at Tematica alongside our thematic lens.
As I have also shared, we have seen a cold snap that gripped much of the country as well as disruptions due to recent winter storm Grayson. Odds are pretty high that these two factors have led to some construction delays this month. I expect construction and related companies to discuss this weather impact when they report 4Q 2017 results, and it could lead to softer than expected guidance for the current quarter.
Putting all of that together, I am adding shares of Vulcan Materials (VMC), the largest pure-play supplier of construction aggregates (primarily crushed stone, sand and gravel) and a producer of asphalt mix and ready-mixed concrete with a coast to coast footprint, as well as United Rentals (URI), the largest equipment rental company, to the Tematica Investing Contender List.
(As a reminder, Contender List companies are those that we are doing more work on and, in some cases, we’re waiting for the risk to reward tradeoff to reach more appetizing levels. You can view the full Contender List by clicking here, just scroll down the page to below the full Tematica Select List Companies.)
With United Rentals and Vulcan Materials, I see these companies benefitting from the potential rebuilding infrastructure boom to be had over the next several years, which should drive robust EPS growth provided Washington can reach across the aisle and provide funding to rebuild the roads, bridges, tunnels, dams, airports and other parts of U.S. infrastructure that the American Society of Civil Engineers (ASCE) rates a D+. More on the reasons behind that rating and what needs to be done can be found here.
As we start to hear from other construction and related companies next week, I’ll look to assess the potential weather impact to be had on the businesses as well as shares of Vulcan Materials and United Rentals and balance that with potential entry-points that will land them on the Tematica Investing Select List.
Doing some Contender List house cleaning as well
As we add Vulcan Materials and United Rentals to the Contender List, I’m also going to clean some house there as well. For starters, a mea culpa of sorts as both Corning (GLW) and McCormick & Co. (MKC) shares have already graduated to the Select List – perhaps a lump of coal was warranted in the Tematica elves stockings this past year. Given continued food quality issues and concerns over consumer spending vs. debt reduction in 2018, we will also shed Chipotle (CMG) shares from the Contender List. Lifelock was acquired in 2017, so that will be removed as well. Exiting CES 2018, we did not see much that inspires confidence in Immersion (IMMR) shares so they too will be removed at this time; that said, we will keep tabs on haptic virtual reality developments and revisit IMMR shares should that technology move past the concept stage.
With 5G gaining ground given recent announcements from AT&T (T) as well as T-Mobile USA (TMUS) and now Sprint (S), I plan on keeping a close watch on Dycom Industries (DY) shares. There is ample reason to be bullish, but given the nature of the specialty construction that they do for their customers – building wireless, wireline and backhaul networks, odds are they experienced some weather-related issues this month. As such, DY shares, as well as VMC and URI, will be under an even closer microscope over the next few weeks.