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3 Top Infrastructure Stocks to Watch in June

By Lee Samaha – Updated Jun 5, 2020 at 4:25PM

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The investment cases for buying infrastructure plays Caterpillar, Union Pacific, and Equinix are going to be reexamined in June.

Investors interested in buying stock in construction machinery company Caterpillar (NYSE: CAT), railroad Union Pacific (NYSE: UNP) and data center real estate investment trust (REIT) Equinix (EQIX 1.33%)are going to receive data and management commentary in the coming month which will help them decide whether to buy the stocks or not. Here's why and what to look out for. 

Caterpillar

Investors will want to see that the company's retail sales are starting to trend upwards rather than decline. As previously noted, Caterpillar's dividend looks sustainable, but management has started to back off from the margin and cash flow targets set on its investor day in 2019 -- a sure sign of stress. 

The company publishes its retail sales data every month, and frankly, the numbers aren't going to be good. Caterpillar reports in terms of rolling three months figures, so the next number published will be March-May 2020, compared to the same period last year.

Given that this period will coincide with the worst of the lockdowns in Europe and America, it's highly likely that Caterpillar's numbers will show hefty declines. However, investors will be hoping to see the declines start to flatten out so that the trend can start to turn upward. 

Caterpillar retail sales

Data source: Caterpillar presentations.

Another thing to look out for is the regional breakout. China is the country of origin of the coronavirus, and it was the first major country to open up its economy again. As such, the Asia/Pacific region could continue to trend upwards for Caterpillar, particularly in construction and mining. Something to look out for, as continued growth in China would provide some revenue support for the company in a difficult period.

Caterpillar total machine sales by region.

Data presentation: Caterpillar presentations.

Union Pacific

The Class 1 railroad's management is always very vocal during the presentations it gives during conferences, and investors should keep an eye on what it says about current trading conditions.

For example, chief executive officer (CEO) Lance Fritz spoke at a recent Bernstein investor conference and reaffirmed his expectation for carload volumes to see a yearly decline of 25% in the second quarter following a 7% decline in the first quarter.

He also updated on current trading in the second quarter, telling investors that bulk (coal/renewables, grain/grain products, fertilizer, and food & beverage) was down 19% -- but interestingly grain specifically was up 8%, possibly on the back of increased demand from China following the phase 1 deal. If so, then it should interest Deere (DE -2.08%), investors as the agricultural machinery maker is hoping increased demand for U.S. soybeans will spur equipment sales. 

Freight train carloads.

Image source: Getty Images.

Fritz also said Union Pacific's industrial group (energy, forest products, industrial chemicals/plastics, and metals & materials) was down 16%, driven by the decline in the price of oil. Premium (automotive, intermodal) was down 30% on weakness in automotive production and consumer demand.

Although the numbers look grim, and will remain so on a yearly comparison, there's tentative evidence that railroads may be over the worst. The Association of American Railroads (AAR) publishes weekly rail traffic data, and here's what AAR Senior Vice President John T.Gray said in the last update for the week ending in May 23:

Of the 20 carload categories we track, 15 had modestly higher loadings last week than the week before, led by motor vehicles and grain. Meanwhile, intermodal originations were higher last week than in any of the previous 11 weeks.

Hopefully Union Pacific's management will also report some modest signs of improvement when it speaks to investors throughout the month. 

Equinix

Data centers could be one of the very few industries seen as beneficiaries of the COVID-19 pandemic. At least, that's probably how shareholders in Equinix and the Digital Realty Trust must be feeling about matters right now.

The two companies own and run data centers that store the data that's built up in the digital economy. As such, they benefit from the increased adoption of e-commerce, remote working, digital technologies and the Internet of Things. If the pandemic is going to encourage digitization of businesses, then the data created will have to be stored and analyzed somewhere -- good news for Equinix.

As you can see below, it's been a pretty good year for shareholders in Equinix and Digital Realty Trust.

EQIX Chart

Data by YCharts

To be fair, data centers are not completely immune from economic weakness, but so far they have been doing relatively well. On its first-quarter earnings call Equinix's management reduced its forecast for normalized constant currency revenue growth in 2020 to 7%-9%, compared to 8%-9% previously.

However, it wasn't that much of a reduction, and during the earnings call Equinix CEO Charles Meyers spoke of "early signs of a bit more return to normal" in the second quarter, and noted he was seeing "a greater resolve" from customers toward making "commitments to move forward aggressively with their digital transformation needs."

Investors will want to see that positive momentum confirmed in management's commentary in order to support the investment thesis that data centers are likely to see demand boosted by benefit the coronavirus crisis.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Digital Realty Trust and Equinix. The Motley Fool recommends Union Pacific. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$164.08 (-1.10%) $-1.82
Union Pacific Corporation Stock Quote
Union Pacific Corporation
UNP
$194.82 (-2.20%) $-4.38
Equinix, Inc. Stock Quote
Equinix, Inc.
EQIX
$568.84 (1.33%) $7.45
Digital Realty Trust, Inc. Stock Quote
Digital Realty Trust, Inc.
DLR
$99.18 (2.34%) $2.27
Deere & Company Stock Quote
Deere & Company
DE
$333.89 (-2.08%) $-7.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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