How Government Spending is Boosting Infrastructure Stocks

Scale and Scope of Government Infrastructure Spending

Government infrastructure spending is significantly increasing, supporting market health and non-residential demand. Federal and state policies are accelerating energy transitions and reinforcing domestic manufacturing. Companies are investing in construction equipment for infrastructure projects, benefiting from elevated manufacturing investments and improving housing starts.

"Industry fundamentals remain vastly unchanged with stabilized demand supported by visibility into the balance of the year, and markets continue to be healthy as the U.S. government infrastructure spending further increases." --- (DE, earning call, 2024/Q2)

"Utilities across the United States are experiencing and forecasting meaningful increases in power demand for the first time in many years, driven by the adoption of new technologies and related infrastructure, including artificial intelligence and data centers as well as federal and state policies that designed to accelerate the energy transition and policies intended to strategically reinforce domestic manufacturing and supply chain resources." --- (PWR, earning call, 2024/Q1)

"Construction projects, as well as government related infrastructure, continue to benefit non-residential demand." --- (CAT, earning call, 2024/Q1)

"Capital expenditures in 2024 primarily related to improvements to our new office lease in Houston as well as construction equipment on infrastructure projects compared to expenditures for construction equipment and investments in IT in 2023." --- (FLR, sec filing, 2024/Q1)

"• Benefits from increasing U.S. infrastructure spending, elevated manufacturing investment levels, and improving single family housing starts are expected to partially offset declines in commercial real estate construction and softening rental demand." --- (DE, sec filing, 2024/Q2)

Impact on Revenues and Profits of Infrastructure Companies

Government spending has significantly boosted revenues and profits for infrastructure companies. Quanta Services saw increased revenues in its Renewable Energy and Underground segments, while Caterpillar reported a 5% rise in operating profit. However, Fluor Corporation faced profit challenges due to cost growth and delays, highlighting sector-specific hurdles.

"Revenues. Revenues increased due to a $575.9 million increase in revenues from our Renewable Energy segment and a $36.2 million increase in revenues from our Underground and Infrastructure segment, offset by a $9.1 million decrease in revenues from our Electric Power segment." --- (PWR, sec filing, 2024/Q1)

"Services revenues increased in the quarter. Our adjusted operating profit increased by 5% to $3.5 billion." --- (CAT, earning call, 2024/Q1)

"Segment profit in the 2024 Quarter was adversely impacted by $29 million in cost growth for delays, craft labor and material escalation on a construction only subcontract executed by our joint venture entity in Mexico." --- (FLR, sec filing, 2024/Q1)

"Utilities across the United States are experiencing and forecasting meaningful increases in power demand for the first time in many years, driven by the adoption of new technologies and related infrastructure, including artificial intelligence and data centers, as well as federal and state policies designed to accelerate the energy transition and strategically reinforce domestic manufacturing and supply chain resources." --- (PWR, press release, 2024/05/02)

"The increase was primarily due to the absence of the impact of the divestiture of the company's Longwall business in 2023 of $586 million and favorable price realization of $575 million, partially offset by the profit impact of lower sales volume of $268 million." --- (CAT, sec filing, 2024/Q1)

Sectors Benefiting the Most

Construction aggregates and materials sectors are benefiting the most from government infrastructure spending, with companies like Vulcan Materials and Martin Marietta Materials experiencing increased public demand, improved pricing fundamentals, and steady growth, positioning them well to capitalize on infrastructure tailwinds.

"We're seeing improvement in single-family, which is always helpful. And the most important thing is that you see growth in public demand, which is still visible and it is a very good foundation for pricing." --- (VMC, earning call, 2024/Q1)

"Turning now to the company's first-quarter operating performance, aggregate's pricing fundamentals remain attractive, increasing 12.2% or 12.7% on an organic mix-adjusted basis, underscoring the advantages of our value-over-volume commercial strategy and our sales team's unwavering commitment to receiving appropriate commercial consideration for our valuable and long-lived reserves." --- (MLM, earning call, 2024/Q1)

"I think when it comes to public demand, slow and steady wins the race on this, and particularly when you're compounding your margins like we are, so I think a good healthy sector with steady growth for years to come." --- (VMC, earning call, 2024/Q1)

"We're well-positioned to benefit from infrastructure tailwinds, providing steady product demand and favorable commercial dynamics across our coast-to-coast footprint." --- (MLM, earning call, 2024/Q1)

"Better unit profitability yields better free cash flow. Our free cash flow conversion over the last five years has averaged over 90%, enabling us to strategically allocate capital to reinvest in our franchise, grow our business and return cash to shareholders." --- (VMC, earning call, 2024/Q1)

Supply Chain Effects of Increased Spending

Increased government spending on infrastructure is prompting companies like Caterpillar and Nucor to adapt their supply chains. Caterpillar is working to minimize supply chain challenges, while Nucor is managing demand fluctuations, lead times, and pricing, and optimizing inputs to maintain competitive advantage and sustainability.

"We continue to work to minimize supply chain challenges that may impact our ability to meet customer demand." --- (CAT, sec filing, 2024/Q1)

"They would pull ahead demand. Lead times would then extend. Pricing would generally go up beyond, really supply demand balances, inviting imports in, inventories would balloon, and then we had to work that off, and you could see orders stop and pricing fall dramatically." --- (NUE, earning call, 2024/Q1)

"I'd summarize it this way and say that what we're aiming to do is create competitive advantage by supplying our mills with the most cost-effective stream of inputs, and to do that while minimizing the embodied carbon in our finished products. And so that's our guiding light, and under that, then we execute that by building flexibility and adaptability into our raw material stream." --- (NUE, earning call, 2024/Q2)

Risks and Downsides of Increased Spending

Increased government spending on infrastructure can lead to lower margins due to higher materials procurement costs and price risks (PWR). Additionally, managing smaller projects can cause inefficiencies and further impact margins negatively (PWR). However, balancing the risk profile may help mitigate some volatility (FLR).

"While we attempt to structure our agreements with customers and suppliers to account for the impact of increased materials procurement requirements or fluctuations in the cost of materials we procure, our margins may be lower on projects where we furnish a significant amount of materials, as our markup on materials is generally lower than our markup on labor costs, and in a given period an increase in the percentage of work with greater materials procurement requirements may decrease our overall margins, including in some cases our assuming price risk." --- (PWR, sec filing, 2024/Q1)

"I think that's giving us comfort that as we get a better balance of the risk profile within the P&L that we'll start to eliminate some of that volatility moving forward." --- (FLR, earning call, 2024/Q1)

"A greater percentage of smaller scale or less complex work also could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on fewer larger projects." --- (PWR, sec filing, 2024/Q1)