With the world reshaping itself in real-time, there's going to be a lot of demand for fundamental construction projects.
Real Money's Brad Ginesin recently looked a stock he says stands to benefit greatly from the trend.
“The U.S. Infrastructure and Jobs Act is expected to fuel increased domestic investment in capital equipment,” Real Money columnist Brad Ginesin wrote recently “The legislation includes around $550 billion in new federal investment in America's roads, bridges, and water infrastructure, plus rural broadband and resilience efforts to address the impact of climate change on communities.”
Funding from the multi-trillion dollar infrastructure legislation in Washington is flowing out, and that favors heavy-duty equipment and machine providers.
Russia’s war in Ukraine will also unleash a torrent of machinery demand in multiple sectors,” Ginesin said. “Governments and industries worldwide are scrambling to replace the disrupted Russian commodities supply chains, leading to incentives for companies to expand commodity production in mining and energy.”
Farm machinery is another source of strength, especially with higher prices for agricultural commodities due to limited export supply from Ukraine and Russia. “Also, it's more than wishful thinking to expect a "Marshall Plan" to reconstruct Ukrainian cities after the war, funded by nations around the globe,” Ginesin added.
How can investors capitalize on all that capital?
One likely way is with Caterpillar (CAT) Ginesin wrote.
Durable Trends
“Durable economic trends have generated strong demand for Caterpillar's machinery, and these trends will continue for years to come,” Ginesin said. “What's more, the stock is reasonably priced with plenty of upside as robust demand and earnings growth are far from fully baked-in.”
In an upgrade of CAT earlier in March, Jefferies noted, "Recent turmoil in Eastern Europe fundamentally reshapes global commodity markets, driving structurally higher pricing and after years of underinvestment capacity additions and supply diversification will be necessary in both mining and oil & gas sectors, though new projects will take time. CAT has historically been a strong hedge to commodity and general inflation.”
“We increase our rating to BUY from HOLD and increase our price target to $260."
Meanwhile, Caterpillar's burgeoning services business is a continued growth driver, with plans to double revenues to $28 billion by 2026. CAT has over 500 software-enabled mining trucks operating autonomously at various quarry sites, leading to higher machine utilization and productivity.
Almost all of Caterpillar's free cash flow is returned to shareholders via dividends and buybacks. “The $5 billion returned in 2021, split between a 2% dividend yield and $2.5 billion in buybacks, amounted to about a 4% total return,” Ginesin said.
With Caterpillar's demand exceeding supply due to supply-chain constraints and visibility for robust demand stretching for years, the business cycle is likely to be elongated.
“CAT shares should benefit as industry trends favor its machinery while the company has room for operational improvements,” Ginesin noted. “Strong earnings and cash flow at a reasonable 18 P/E make this stock one to own.”
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