Unsurprisingly, the market for single-family housing in the U.S. is facing stiff headwinds from rising mortgage rates and consumer price inflation. What may come as a surprise, however, is that multifamily housing and non-residential starts are still seeing growth in spite of those obstacles, which is good news for infrastructure stocks.
This under-the-radar trend was highlighted in the third-quarter earnings call for Vulcan Materials (VMC), a leading producer of construction aggregates (e.g. gravel, crushed stone and sand, as well as asphalt and concrete). The company pointed out that overall residential construction remains at “high levels” and noted that trailing 12-month private non-residential starts are up 21% over the prior year as of October.
The firm also said public spending is in “growth mode” with trailing 12-month highway starts up 14% and infrastructure starts up 18%. In fact, July and August were the two largest single months for Vulcan’s highway awards in the last 10 years!
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Echoing this theme, Caterpillar (CAT) just reported a 21% revenue increase for Q3, along with a 33% increase in construction-related machinery and engine sales in North America. The firm noted that while residential construction has pulled back, it remains at “elevated” levels, while nonresidential construction is “strong.” Moreover, Caterpillar sees the bullish trends in those markets persisting as government-funded infrastructure projects accelerate in the coming months.
Wall Street has taken note of the surge in big-scale construction projects, with one major investment bank observing that 40-year highs in the U.S. inflation rate, along with rising aggregates pricing, support further gains next year for the major construction product and service providers. The bank added that last year’s passage of the Infrastructure Investment & Jobs Act by Congress “could provide a once-in-a-generation type infusion for infrastructure projects in coming years.”
Given the renewed push toward public works spending, construction and infrastructure stocks are conspicuously outperforming right now and are among the market’s top performers in Q4 to date. A combination of federal infrastructure spending on public works like roads and highways, reshoring of industrial manufacturing in the U.S., energy sector spending—plus a stronger-than-anticipated commercial real estate sector—explains the big boost to many of the leading construction and heavy equipment stocks.
An Infrastructure Stock & ETF Benefiting from the Trend
One of the top winners in the infrastructure space in recent months—and one I anticipate will continue leading the pack—is Granite Construction (GVA), which provides services and building materials for both public and private transportation projects, including roads and highways, bridges, dams, railroads and airports. Continuing the trend seen in Q3 among related firms, Granite beat the Wall Street consensus on both the earnings and sales front while boasting several major highway project wins in the Southwestern region of the country.
Last month, Granite also bagged a $170 million reconstruction contract for Interstate 10 in Arizona by the state’s Transportation Department and also recently received a $30 million construction contract from the U.S. Dept. of Homeland Security, along with several road improvement contracts in California. All told, the company should continue benefiting from the buoyant spending environment.
Another example of this trend can be seen in the Global X U.S. Infrastructure Development ETF (PAVE). This fund seeks to invest in companies that stand to benefit from the continuation of elevated levels in state and federal infrastructure activity, including those involving raw materials production, heavy equipment, engineering and construction. As such, PAVE is a worthy proxy for the overall infrastructure sector.
After rallying 25% from its low for the year at 22 in July and August, PAVE had a bumpy ride during the broad market weakness of September, nearly falling back to its prior low but stopping short and establishing a higher low around 23 instead. The ETF has been on a rip-and-tear in the last eight weeks and is now bumping up against a multi-month high.
Some weakness around the nearby chart “resistance” level can likely be expected in the short term, but in view of the solid fundamental outlook, PAVE is a potential buying opportunity for investors with a 12-month or longer time frame as the Infrastructure Investment & Jobs Act continues to exert a salutary effect on the entire building sector.
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