Because traditional infrastructure like roads, bridges and ports need regular maintenance and upgrades, it’s no surprise that the infrastructure sector has been enjoying renewed investor attention with the economy’s reopening. This is evidenced by the Global X U.S. Infrastructure Development ETF’s (PAVE) and iShares U.S. Infrastructure ETF’s (IFRA) 21.4% and 17.7% respective returns year-to-date.
Furthermore, because President Biden recently reached an agreement with a bipartisan group of senators on a $1.2 trillion infrastructure plan, the industry is expected to be the recipient of even more investor attention this month and beyond. However, not all stocks in the infrastructure space are solid bets currently.
Eaton Corporation plc (ETN) and Oshkosh Corporation (OSK) are two fundamentally sound stocks in the infrastructure space that we think have the potential to capitalize on the industry tailwinds. So, it could be wise to bet on them now. Conversely, we believe investors should steer clear of the stocks of Vulcan Materials Company (VMC) and Martin Marietta Materials, Inc. (MLM) given their lofty valuations, which look untenable considering the company’s bleak near-term growth prospects.
Click here to check out our Infrastructure Sector Report for 2021
Stocks to Buy:
Eaton Corporation plc (ETN)
Based in Dublin, Ireland, ETN is a power management company. Its segments include electrical products, electrical systems and services, hydraulics, aerospace, vehicle and eMobility. The company operates in more than 175 countries.
ETN’s sales from its electrical global segment increased 9.5% year-over-year to $1.25 billion for the first quarter, ended March 31, 2021, and its sales from its vehicle segment increased 9.4% year-over-year to $654 million. The company’s adjusted income increased 12.3% year-over-year to $577 million. And its adjusted EPS came in at $1.44, up 15.2% year-over-year.
For its fiscal year 2021, analysts expect ETN’s EPS and revenue to be $6.22 and $19.08 billion, respectively, which represents a 46.7% and 6.8% year-over-year increase. It surpassed consensus EPS estimates in each of the trailing four quarters.
On June 1, ETN completed the acquisition of Cobham Mission Systems, a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation. The acquisition is expected to expand ETN’s market reach in the aerospace business. The stock has gained 69.4% over the past year to close yesterday’s trading session at $148.18.
It’s no surprise that ETN has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has an A grade for Sentiment and Momentum, and a B grade for Growth and Quality. Click here to see ETN’s ratings for Value and Stability also. ETN is ranked #18 of 84 stocks in the A-rated Industrial-Machinery industry.
Click here to check out our Industrial Sector Report for 2021
Oshkosh Corporation (OSK)
OSK designs, manufactures, and markets a wide range of engineered specialty vehicles and vehicle bodies. The Oshkosh, Wisc., company operates through four segments: access equipment, defense, fire & emergency, and commercial. Its commercial segment’s offerings include front- and rear-discharge concrete mixers for the concrete ready-mix industry, and field service vehicles and truck-mounted cranes.
For the fiscal second quarter, ended March 31, 2021, OSK’s net sales were $1.89 billion, up 5.1% from the same period last year. The company’s net income came in at $99.60 million, representing a 45.2% year-over-year increase. Its non-GAAP EPS increased 18.4% year-over-year to $1.48.
OSK’s EPS and revenue are expected to increase 50% and 22.7%, respectively, year-over-year to $1.95 and $2.19 billion for the quarter ending September 30, 2021. It surpassed the Street’s EPS estimates in each all the trailing four quarters.
Last month, the company’s fire & emergency segment unveiled its Volterra platform for electric vehicles (EVs) with the introduction of two new trucks under the Pierce Manufacturing and Oshkosh Airport Products brands. OSK is expected to witness increasing demand for its EVs as it combines the company’s proprietary and patented technologies with leading-edge operational performance, functionality, and safety attributes. The stock has rallied 74% over the past year to close yesterday’s trading session at $124.64.
OSK’s POWR Ratings reflects this promising outlook. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. It has an A Grade for Value, and a B grade for Sentiment. In addition to these grades, one can see OSK’s ratings for Momentum, Growth, Stability, and Quality here. OSK is ranked #12 of 58 stocks in the Auto & Vehicle Manufacturers industry.
Click here to check out our Automotive Industry Report for 2021
Stocks to Sell:
Vulcan Materials Company (VMC)
VMC is the supplier of construction aggregates such as crushed stone, sand, and gravel, and a producer of asphalt mix and ready-mixed concrete. It operates through four segments: Aggregates, Asphalt Mix, Concrete and Calcium. VMC is based in Birmingham, Ala.
The company’s total revenue for the first quarter ended March 31, 2021, was $1.07 billion, which represents a 9.1% sequential decline. Its gross profit decreased 24.3% sequentially to $229.27 million. And its cash and cash equivalents decreased 39.7% sequentially to $722.34 million.
VMC’s lofty valuation is not justified by its financials. In terms of forward non-GAAP P/E, its 33.08x is 116.5% higher than the 15.28x industry average. Its 4.97x forward EV/S is also higher than the 1.81x industry average.
VMC and U.S. Concrete, Inc. (USCR) last month agreed to merge. VMC will acquire all the outstanding shares of USCR. However, several law firms have launched an investigation into whether USCR’s board members breached their fiduciary duties or violated federal securities laws in connection with the proposed acquisition. VMC has retreated 5.1% over the past month to close yesterday’s trading session at $174.07.
VMC’s poor prospects are also apparent in its POWR Ratings. The stock has a D grade for Value. Click here to see the additional POWR Ratings for VMC (Sentiment, Momentum, Growth, Quality, and Stability). VMC is ranked #33 of 53 stocks in the Industrial-Building Materials industry.
Martin Marietta Materials, Inc. (MLM)
MLM is a natural resource-based building materials company, based in Raleigh, N.C., that supplies aggregates and heavy-side building materials to the construction industry. Its offerings include crushed stone, sand, gravel products, ready mixed concrete and asphalt, and paving products and services.
The company’s total revenues for the first quarter ended March 31, 2021, was $982.40 million, representing a 16.7% sequential decrease. MLM’s net earnings decreased 64.3% sequentially to $65.30 million. Its EPS declined 64.5% sequentially to $1.04.
In terms of forward EV/S and EV/EBITDA, MLM’s respective 4.82x and 16.63x are higher than the 1.81x and 7.84x industry averages. Analysts expect its revenue to increase 9.2% year-over-year to $1.39 billion for the quarter ending September 30, 2021. However, its EPS is expected to decline 5.9% year-over-year to $4.43 in the same quarter.
On June 21, 2021, MLM priced $700 million of senior notes. It plans to use the proceeds, along with cash in hand, to pay for its previously announced acquisition of the Lehigh West Region Business. The stock has declined 3.3% over the past month to close yesterday’s trading session at $351.81.
MLM’s POWR Ratings are consistent with this bleak outlook. The stock has a D grade for Value. To see more of MLM’s component grades, click here. MLM is ranked #31 in the Industrial-Building Materials industry.
Click here to check out our Infrastructure Sector Report for 2021
ETN shares were trading at $149.77 per share on Thursday morning, up $1.59 (+1.07%). Year-to-date, ETN has gained 26.01%, versus a 15.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Ananyo Guha Niyogi
Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand. More…