The coronavirus pandemic has dominated our minds and government efforts for the past couple of months. At this writing, more than 67,000 Americans have died and over 1.1 million people have been diagnosed with COVID-19, even with extreme efforts to reduce the spread of the highly contagious disease. In addition to the death toll, the economy has been ground to a halt, putting more than 30 million Americans out of work and millions more on reduced income as their hours have been slashed.
But looking at the bigger picture, infrastructure remains a major concern. Energy, communications, transportation, and water are just as necessary in a recession as when the economy is booming, and as we move deeper into earnings season, investors can start getting a more clear picture how these important industries are being affected by the coronavirus crisis.
Three infrastructure companies in particular deserve attention from investors in May: Infrastructure asset owner and operator Brookfield Infrastructure Properties (BIP 1.31%)/Brookfield Infrastructure Corporation (BIPC 1.03%), renewable energy, power transmission, and water asset operator Atlantica Yield (AY -0.68%), and engineering and professional services provider NV5 Global (NVEE -1.13%). NV5 and Brookfield Infrastructure have both scheduled their first quarter earnings reports on May 7 and 8 respectively, and Atlantica Yield, while Atlantica Yield has historically reported its first quarter results in May as well.
In addition to getting an update for their current operations, this upcoming quarter will mark our first chance to get a better understanding of exactly how these companies are being affected by the coronavirus pandemic, and what management says to expect going forward.
Is the COVID-19 lockdown impacting demand?
In more "normal" recessions, businesses that provide utility services like power, natural gas, water, and telecommunications typically see minimal downturn in demand. Even if usage is down, factories and businesses are still running, and consumers may miss a credit card payment, but the power bill remains a priority.
But this time, things are different with millions of businesses now closed under social isolation orders, including large factories. Simply put, even many sure and steady utilities will see reductions in revenues and earnings. That's likely to be the case for Brookfield Infrastructure, which owns a wide array of regulated utility assets including telecommunications, gas and electricity, around the world. It also owns important transportation assets including some ports that will have seen lower volume due to the big drop in commerce in the past two months.
It's less clear how Atlantica's business results will be impacted. All of its production is either sold under long-term contracts or operates as a regulated utility, so much of its business is likely well-insulated from any demand reductions its utility customers may be facing. Atlantica Yield has typically reported around May 10 each year, so we can expect an update from the company this month.
For investors in these two businesses, getting an idea of the current state of demand for their services is important, since dividends drive an enormous part of their return profiles:
Both have solid recent track records of dividends growth, and their payouts are typically safe in a recession. While I expect both will be able to maintain their current payouts, in these unprecedented times it's worth paying closer attention to what management says.
What about infrastructure spending?
Unlike the two businesses above that generate steady, recurring revenue from their operating assets, NV5 is a different animal. The company provides technical services including engineering, surveying, project management, and many more across every aspect of infrastructure imaginable.
And unlike the more consistent demand for utility services, these are often the sorts of spending that companies cut back on during recessions. Projects get delayed or cancelled as companies take a step back and reevaluate their short-term and long-term needs. That's particularly true in the current environment, when many businesses are dealing with operations that may have been shut down literally overnight and without a clear line of sight to when business will recover. The U.S. oil and gas industry is an excellent example of a major infrastructure spender that's been disrupted, and could take years to recover.
Investors are certainly worried about this disruption in spending for NV5. Its stock price is down 37% from the 2020 high and was down almost 60% at one point.
NV5 is a smaller player in the multitrillion-dollar global infrastructure space, but it's diverse business can still help establish a baseline on what to expect over the next year. Moreover a lot of the projects NV5 does are government projects that aren't as likely to get pushed off, but it will still be valuable insight to hear from the company's management.
The company may not have the built-in recurring revenues that come with owning and operating infrastructure assets, but it does have more than $500 million in revenue under firm contracts on its backlog, so that will help smooth out what could prove a bumpy 2020. Moreover, infrastructure spending is something that gets bipartisan support, so it's possible that we finally see the political will necessary to move the ball forward on a large federal infrastructure improvement bill. That would be a big positive for NV5.
Deeper insight into this massive industry in the midst of global upheaval
Looking past the short-term worries over spending in the midst of a global pandemic, infrastructure spending is a major global need. In developed countries, aging infrastructure is a serious problem, while the global middle class will expand by 1 billion people over the next decade. It will require trillions of dollars in spending to meet the infrastructure needs of these two things.
And while we won't get all the answers about the long-term implications for the space, we will get a little more insight. And just as importantly for the now, the next couple of weeks will give us better information to work with on how the coronavirus pandemic is impacting these companies, and what that means for investors.