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2006-08-24 :: Tweaking Infrastructure

Infrastructure stocks are still one of my favorite asset classes, in spite of their dismal performance since May 12th’s stock market selloff began.  We have been using this time to tweak our holdings of infrastructure companies, and have sold off two:  Florida Rock and Headwaters.

Florida Rock has a great long term track record and will be a great company to own in the future.  Unfortunately, their fortunes are tied very closely to the housing market, which is in a consolidation mode for the forseeable future.  Florida Rock is benefiting from the rebuilding of the post-Katrina Gulf Coast, but not enough to convince the traders in New York that its not a housing stock.

Headwaters growing business segment is one that converts the byproducts of burning coal (the ash) into useable fuels.   Unfortunately for them, they also have a housing related business segment (manufactured stone and siding), which is causing them to be sold off with the housing market.  The coal-related business is the reason we purchased HW in the beginning, and it is seeing strong earnings growth as anticipated, given the move to add coal fired generators to electric plants to replace natural gas generators.  But, its tough to fight the trend when the traders get something in their heads.

We’ll likely buy these stocks back at some future point as their business fundamentals are too sound.  Right now, though, we will focus our infrastructure investing on non-residential housing related companies.

Below, I’ve cut/paste a story from BusinessWeek that details the success of the non-residential infrastructure business. 

More later!

Mark

Construction: A Tale of Two Sectors

Is there a building boom in the U.S.? It depends on which segment of the construction industry you’re looking at.

A surprising array of major U.S. macro indicators — consumer spending, factory activity, corporate profits, and trade — continues to defy expectations of an economic slowdown. And that strength is also fueling a hefty boom in the nonresidential construction market. But good news for the builders of office buildings and schools hasn’t filtered through to the economy’s one nagging weak spot: the housing market.

Flush times continue for the nonresidential construction industry. Nominal [i.e., unadjusted for inflation] growth in the sector has hovered in the 17% to 25% range since Hurricane Katrina, with little signs of a slowdown. The boom in the real [adjusted for inflation] spending figures has been nearly matched by an unprecedented explosion in construction materials prices.

What’s the implication here? Companies’ construction spending is in nominal dollars, so when price pressures finally subside in this booming market — as suppliers eventually deliver larger quantities to buyers — the dropback in prices will probably allow a sustained solid growth path for real spending. Companies should be able to accelerate building plans as acquisition of materials becomes more price-effective.