Since the election, the market has been in love with the idea that infrastructure spending will soon be a boon for both commodities and the overall construction industry. A rise in commodities like copper and steel has led to speculation that dry bulk shippers will see a recovery and mining companies have gotten a boost as well. And if construction spending increases, it'll mean more equipment and raw materials are needed by the industry.
Two companies that may be big beneficiaries if there is indeed a boom in infrastructure spending are equipment manufacturer Caterpillar (NYSE:CAT) and tire manufacturer. Titan International (NYSE:TWI) and they have exposure to just about every part of the infrastructure supply chain, meaning investors don't have to bet on the right commodity play to make money.
The indispensable construction component
Whether it's backhoes, dump trucks, or compact loaders, you can bet a piece of Caterpillar equipment will be on any major infrastructure project. And the company will also play a big role in equipping the mines generating raw materials like iron ore, coal, and metals. And you can see below that Caterpillar is in need of a pickup in demand.
The drop in demand you see above has been largely due to falling commodity prices around the world. Everything from oil to gold has been on the decline and fewer miners need equipment as a result. If demand from infrastructure projects turns out to be real, it'll mean a big boost in demand for Caterpillar's equipment.
Management recently warned that 2017 may be flat to down slightly from 2016's expected $39 billion in revenue as idle equipment goes back to work and headwinds in commodities and emerging markets continue to hurt operations. But that's before accounting for the $1 trillion infrastructure bill that's been rumored once the new Congress gets to work next year. Under current conditions, Caterpillar may not have much growth in its future, but if infrastructure spending increases dramatically this cyclical stock may finally see operations on the upswing again.
Where rubber meets the road
A similar dynamic affecting Caterpillar has hit demand for Titan International's tires as well. Big tires haven't been needed for new mining and farming equipment that companies like Caterpillar make and and with some equipment idle there's also less need for replacement tires.
Management has been arguing for the past few quarters that demand has hit a trough and will pick up beginning in 2017 on both more utilization and aging tires for new equipment bought years ago. If commodity prices rise and infrastructure spending picks up, that could be a very accurate prediction.
Tires may seem like a strange bet on infrastructure and commodity spending, but they're a key cog in the construction machine and they're not dependent on a specific industry or commodity. A rising tide lifts tire sales and that may make this a better bet than even Caterpillar in infrastructure spending.
Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Titan International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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