Throughout their presidential campaigns, Donald Trump and Hillary Clinton were rarely on the same page. So when both candidates promised to prioritize rebuilding America's deteriorating infrastructure if elected, it wasn't surprising to see infrastructure stocks jump. From engineering companies such as Jacobs Engineering Group (NYSE:JEC) to building-material companies such as Vulcan Materials Company (NYSE:VMC)(NYSE:VMC)(NYSE:VMC) and Martin Marietta Materials (NYSE:MLM)(NYSE:MLM)(NYSE:MLM) to construction-equipment manufacturers such as Caterpillar (NYSE:CAT) and Manitowoc (NYSE:MTW), nearly every stock exposed to infrastructure has shot through the roof this year.
But can these stocks continue to rally, or could investors have gotten a little too excited too early?
Trump's stance on infrastructure
Investors first turned hopeful last December, when Congress passed the Fixing America's Surface Transportation Act, better known as the FAST Act, authorizing $305 billion in spending on highways and other surface transportation through 2020. Then when both presidential candidates called for great amounts of spending on infrastructure, investors knew they could expect some real action on that front. Trump mentioned a topic that affects every American during his victory speech:
We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We're going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.
Trump's campaign website also elucidates his vision of pursuing an "America's Infrastructure First" policy and "transform[ing] America's crumbling infrastructure into a golden opportunity for accelerated economic growth." His website mentions transportation, water, electricity, security, and telecommunications as focus areas. And of course, who can forget Trump's most-debated campaign promise of building a wall along the U.S.-Mexico border, a potential megainfrastructure project?
Trump even put a figure to his plans: $1 trillion worth of spending on infrastructure over the next decade. That's a big number.
Does that mean infrastructure stocks will explode?
Most infrastructure stocks are already on fire.
One thing is clear: America can't afford to ignore its crumbling infrastructure anymore. But no one knows yet how much Trump will spend on the initiative, or how. His $1 trillion proposal is ambitious and could hit funding hurdles. Trump mentioned implementing tax breaks to attract capital, but that's about as much as we know for now. I think Trump will most likely spend at least as much as Hillary Clinton's proposed $275 billion in spending over the next five years, if not more. That itself should be a big opportunity for infrastructure companies.
As the nation's largest producer of basic building materials such as crushed stone, gravel, asphalt, and concrete, Vulcan Materials is poised to become a major beneficiary. Texas, California, Virginia, Georgia, and Florida accounted for 59% of Vulcan's revenues last year. A National Stone, Sand, & Gravel Association (NSSGA) report released earlier this year pegs these to be among the top aggregates markets through 2020.
Another potential beneficiary is Jacobs Engineering, which provides a wide range of construction services, from feasibility studies to construction and maintenance. Within infrastructure, Jacobs' core competency lies in transportation -- primarily highways, bridges, tunnels, railroads, and ports. The company derived almost 60% of its revenue from the U.S. last year. More important, the U.S. federal government happens to be Jacob's largest customer, accounting for 21.7% of its total revenue in 2015.
Sales of construction equipment should also gather steam once spending on infrastructure picks up, benefiting leading manufacturers such as Caterpillar and Manitowoc. While Manitowoc is a pure-play construction-equipment company, Caterpillar has significant exposure to the mining and oil and gas sectors. Caterpillar, however, might have an upper hand given Trump's affinity to the company, as was evident during some of his speeches.
So should you buy infrastructure stocks now?
Only if you're a long-term investor who can stomach the volatility that might come along if Trump's plans hit opposition. Given the recent rally in infrastructure stocks, it's hard to see why they should continue to trend higher, unless Trump provides a blueprint of his spending plans that gives investors a clearer picture of which infrastructure company could stand to gain and how. For now, most of the infrastructure stocks are already trading at lofty valuations without any sense of direction regarding the companies' sales and profits. So investors might want to wait for some clarity before jumping in, to avoid getting burnt.