In this episode of Industry Focus: Energy, Motley Fool contributor Jason Hall joins host Nick Sciple to break down President Joe Biden's infrastructure plan, discuss potential winners and losers, and suggest ways to think about legislative action when establishing an investment thesis.

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This video was recorded on April 8, 2021.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. It's infrastructure week on the podcast. Jason Hall joins me to take a look at President Biden's infrastructure proposal and what it might mean for investors. Jason, welcome back on the show.

Jason Hall: It's great to be on. It's infrastructure week right here, but it's been infrastructure week in congress for about 30 years I think.

Sciple: Yeah. It's a meme at this point of it's always infrastructure week, lots of proposals. It's been a topic of conversation, Jason, to your point for a long time. We've talked about a number of companies on this show, infrastructure-type companies. They've heard us say Brookfield Infrastructure Partners (NYSE: BIP) a bunch of times, we may talk about that company later. But before we get into the President's proposal, the numbers involved there, why is infrastructure something that we've been talking about for so long even before this proposal came down the pike.

Hall: Because it's deteriorating in the developed world, especially in the U.S. You look at the American Society of Civil Engineers, and every year or two they release this scorecard, the report card for America's infrastructure, and it was a C- last time around, and that was actually better. Just a couple of crazy statistics. They say a water main breaks somewhere in the United States every two minutes. Six billions of treated water is lost every day, it's enough to fill 9,000 swimming pools. I can't remember the exact number, but American Water put it in one of their presentations that something like 20% of the treated water in the United States is lost. We all hear about the bridges and roads. Here's a big one that jumped out at me. I want to throw this out there. This caught me off guard when I read it in the Biden plan. Something like 30 million Americans don't have access to high-quality, high-speed Internet in 2021. As much as the bridges and the roads and the water are critical, in modern society, if you don't have access to high-speed Internet, you're left out.

Sciple: Right. I think we talk about the importance of infrastructure and infrastructure is the lifeblood of what makes things run behind the scenes. I think we're at the point where the Internet, to this particular point. Said point like a bunch of times. But we're at this point where the Internet infrastructure is essential, it's not a nice-to-have anymore, we've seen this past year where lots of folks who couldn't go to work without Internet access. In the past, you've just said you couldn't have gone to work without a car, and we talked about how important highway infrastructure is, and I think the importance of the Internet is starting to reach that level. If you don't have access to plug into that network, you're really at a structural disadvantage. Just like if you don't have a car, you're structurally disadvantaged in finding a job, those sorts of things. We're at this new wave of infrastructure here coming down the pike.

Hall: Yeah. I think it's even too hyper focused on this one issue with Internet access and speed and data and reliability. If remote work is going to become a bigger thing, it becomes even more important because what we're doing right now takes a lot more bandwidth and a lot more reliable Internet than just sending and receiving emails. It's becoming even more important.

Sciple: Absolutely. Lots of things wrapped up in this plan. Maybe we can run through a few of the line items and maybe talk about the things that popped out to us. I can just run through some high-level numbers for us. I said at the top it's a $2.3 trillion plan. Breaking that down into the sub categories, we've got $400 million for home and community care as our population ages, hoping to take care of some of the elderly, $213 billion for affordable housing, so this is refurbishing existing housing and putting new housing in place, $174 billion for electric vehicles and electric vehicle infrastructure, that includes half a million electric vehicle charging stations by 2030, $115 billion for roads and bridges, this is the Bernie Sanders, gets him excited because roads and bridges are crumbling, [laughs] $100 billion for high-speed broadband, $100 billion for school construction, $100 billion for the power grid and clean energy, $85 billion for public transit, and then $80 billion for railways. Obviously, that's a huge long wish list, this has to get through congress, so the likelihood that every single one of those line items gets funded at 100% levels isn't likely. But when you look at this wish list, what pops out to you, Jason, what are your thoughts?

Hall: The obvious big one is home community care because it's such a massive number. But the other thing is that you think about it more broadly. There is a lot of technology that's tied into this now. You think about EVs and as we've seen only one company is truly successful in manufacturing EVs at any scale, $174 billion to build the infrastructure to make it more feasible, and then broadband. Those just really stand out to me as being important. Because a lot of the other stuff, it's the typical things that we see, it's the asphalt, it's the concrete, it's the steel, it's the nuts and bolts stuff. But seeing that focus on where technology is going to drive the future economy, I think is really important.

Sciple: Yeah. There was an interesting quote from Biden, and he said. "200 years ago, trains weren't traditional infrastructure until America made the choice to lay down tracks across the country. Highways weren't traditional infrastructure until we allowed ourselves to imagine that roads could connect our nation across state lines." Now, it's kind of this idea. One of the other line items I think it is important to call out is $50 billion for semiconductor research and infrastructure. Put in place, we've talked, this past year, about how systemically important semiconductors are, and we were seeing, to your point, Jason, lots of this money going toward what we think of it as traditional infrastructure with roads and bridges and highways and energy, and then we have some of this new infrastructure that's starting to getting acknowledged as really important, whether that's semiconductors or high-speed broadband, or what have you. Go ahead, Jason.

Hall: I was just going to say absolutely. But I think you have to extend and think about the data center companies to the nontraditional companies that tie the telecommunications network together like American Tower. We think a little more broadly about what infrastructure really means, and it's more than it was even 10 or 15 years ago?

Sciple: Yeah. I think one of the interesting things too, as you look at the history of infrastructure, the government involvement has always been extremely high. You've got to think about the grants, the railroads got to put railroads in place, and those sorts of things, I think. You look at the timing of that as well, that the highways were in the 1950s. That's like 30 years after the modality. When you look at the railroad construction, the big transcontinental railroads like 1860s. That's about a few decades after railroads really started catching on. We're on the same historical timelines, when we would see that take place as what we've seen in history. I think certainly, these areas are going to become more important and we'll see other than this bill, or another one more government involvement there. The other interesting thing I think from the plan that folks are going to talk about, is the tax aspect of the plan, trying to pay for these requirements. Part of that is a proposal to increase the corporate tax rate to 28% from the current rate at 21%. It's interesting because this is still much lower than the corporate tax rate in 2017, which is 35%. This is proposing to bump up the corporate tax rate, but we're still only half way back to where we were in 2017.

Hall: Yeah, and I think this is the part where the partisan debate is going to be the most heated in terms of how this comes out, and obviously, we're not, that's outside of our wheelhouse, but at the end of the day, we're talking about something that there is massive bipartisan support for. I'm not talking about just within the halls of Congress, I'm talking about throughout society. This is an important thing, you think about Flint, Michigan. It's a city where the water supply was largely undrinkable. You think about the impact of drought and a lot of places impacting water supply. You think about our grids already, whether it's from the impact of wildfires, or our ability to deploy renewables. Where there's wind blows in the sunshine, is largely separated from the most populous areas. We have to get the infrastructure to make that even a functional reality for more of our power. There's certainly bipartisan interest, but how do we pay for things, who, buddy? That's a big question.

Sciple: Certainly. We'll get into now maybe talking about some winners and losers. Certainly, there's going to be some folks that this corporate tax increase negatively impacts them. They don't they don't see a direct benefit from the infrastructure side, I think it's like banks and financials maybe as companies that might be hit by this increase in the corporate tax rate. When you look at the companies that are going to get a boost from this potential legislation in whatever form it may come. What companies come to mind for you, Jason?

Hall: There's a few that are obvious, and I think to a certain extent, the thing that investors should do is not get too cute with trying to find companies that are set to hyper-benefit from this, because there's an inverse side of that where the risk lies. But for me, the two that really jumped out the most, are Brookfield Infrastructure, and Steel Dynamics (NASDAQ:STLD). I'll start with Steel Dynamics because this is a company that's based in the U.S. and all of its operations are in North America for the moment. I don't think there's anything outside of North America. The short version is Steel Dynamics is the steelmaker, their youngest steelmaker to be launched, large-scale steelmaker to be launched in the U.S. They were founded by some folks from Nucor. Anybody that knows anything about the steel industry knows that Nucor really was a major disruptor, and is the largest steel producer in North America that innovated using electric arc furnaces, many mills, as they call them, versus these large blast furnace steel facilities. 

Steel Dynamics was built from the ground up with the same model. Here's why this is important. The bottom line is that the steel industry, like a lot of these businesses that rely, that are tied to infrastructure, are very cyclical in demand. We're where we are because the demand cycles have been slow to respond, and what we see is periods where spending goes up, and a lot of time it's funded by government programs. There's lots of money that gets spent, so there's lots of money to be made. In the steel industry, you think about its exposure to the energy industry, exposure to the automotive industry, exposure to consumer spending. Those are cyclical things, and a lot of them overlap one or another. That means it's high for exposure to that. If you're in an industry where you're supplying cyclical businesses, you need to have some variable cost structure. Companies like U.S. Steel, companies like AK Steel, historically have not had that variable cost structure. Steel Dynamics has it because of their use of their electric arc furnaces, that they can scale up and down. Maybe they can't be the most profitable when demand is the highest, but demand spends the least amount of time, that's when demand is at the highest. They need their ability to scale more, than they need their ability to be peak profitable. That's why I like Steel Dynamics because they're a big winter, if we see increased spending here, but they're also strong when the market isn't strong.

Sciple: That's similar to the company that comes to mind for me, Jason, just to list out a few that we've talked about on the podcast in the past, that folks and go back and checkout those episodes. Just last week you talked about Caterpillar and John Deere. Those companies clearly will be beneficiaries for infrastructure spending. Jason and I, along with Matt DiLallo and others have talked in the past, a lot about companies like NextEra Energy or Atlantica Sustainable Infrastructure or Clearway Energy. Some of these yield-co businesses that would benefit from increased investment here. Then in renewables, TPI Composites, SolarEdge are also renewable companies that benefit. Those are companies all we've done episodes on in the past. You can go back and listen to us discuss in-depth. Also wanted to talk about another company that I don't think I've ever discussed on the show that I think is a clear beneficiary for me, and that's Vulcan Materials, ticker VMC. That company, it's close to me because it's from the Birmingham, Alabama area, that's where it gets the Vulcan name, and so as close to home.

Hall: A lot of people don't know about the Vulcan statue in Birmingham.

Sciple: Yeah, because the steel city in Birmingham, that's all linked to Steel Dynamics as well. It's a link because Vulcan was the god of fire, and the heart and all those sorts of things. Anyway, what does Vulcan Materials do? Where they are based in Birmingham, Alabama, they're one of the largest producers, or providers of aggregate in the United States. They're bases surrounding the southern half of the U.S. 19of the 25 fastest-growing markets, are served by Vulcan's operations. 50% of the population in the U.S. lives within 50 miles of Vulcan operation, then 90% of their revenues are in markets in which they have a No. 1 or No. 2 position. When you think about aggregate, this is gravel, things like that, stuff that goes into this cement that you use to build roads and bridges or to put a foundation and to put a windmill or something like that. It also goes into the foundation of your home. We talked about building more affordable housing and how there is a big shortage of housing in the U.S. Vulcan, their mode is essentially a geographic mode in the sense that it's really expensive to ship these aggregate products long distances. You don't need a gravel pet that serves your needs, it really doesn't make sense for someone to open it up across the street from you, because you already have the customer relationships and all those sorts of things. Once you've set up, it's really difficult for someone to disrupt you, and Vulcan has been growing for over 60+ years, so they have a strong track record of that. 

The way they would benefit us, similar to what Jason said, through dynamics, increased demand for their products as we invest more in building roads and bridges, as well as building more housing in the U.S. that should boost throughput of their products. If you look at Vulcan Materials, it hasn't beaten the S&P over the past three and five years, but it does beat the S&P over the past 10 years. Part of that is there's just been under-investment housing since 2008. There's pent up demand there in theory, as we catch up on our housing, construction, and as we push some of this investment into infrastructure, that should benefit Vulcan Materials from a revenue point-of-view. Look over the past five years, have grown revenue at a 7% annual CAGR, growing their net income at a +20% annual CAGR, and then their levered free cash flow at an 18.5% five-year CAGR. That's all S&P Capital IQ numbers. When you look at this business, this is a business that has succeeded over the long term and its market has a moat that's strongly in place, can benefit clearly from these trends that would get pushed forward by this legislation. But even if nothing happens with the government or anything like that, this is a business that can keep operating and generating returns for investors. That's a company that is interesting to me. Even without government involvement, they have a strong mode that is going to persist.

Hall: I'm going to throw two other little financial statistics about the company out there that I think are really interesting. If you think about that business, and you think, wow, their margins must not be very good, it's got to be about turning over volume and really getting that operating leverage as much as you can, this is stunning. Do you know that their gross margins have not been below 24% in the past five years? 

Sciple: It's a great company.

Hall: Here is that where the leverage does kick in, taking that gross margin. Because let's be honest, like you said, this is not a cheap material to move and to process. Those costs get high on the operating side. Their operating margins have been 16% or higher over that same period. That's really impressive. I would never have guessed this is a company with even double digit operating margins. That supports everything you just said.

Sciple: Yeah. The nature of the business is such that it's not like your margin is my opportunity because the barrier to entry for the business is so high that I can't see how you're going to disrupt them in a meaningful way. I think that's an attractive winner. It's not going to be a huge 10-bagger, four year and five years or anything like that, but I think Vulcan is a clear beneficiary. If you learn Berkshire Hathaway in this bucket as well, Berkshire has a lot of building materials under its portfolio, it's involved in the energy infrastructure through Berkshire Hathaway Energy, obviously has BNSF railroad, and they own Pilot Flying J truck stop, which could be a beneficiary of the move to electric vehicles. That's another company in this building material space, not the sexiest company in the world, but it is a clear beneficiary of this government dollars going into those sectors they say they will.

Hall: Yeah, I think that's a company that's a beneficiary even if they don't. That's something we've highlighted a couple of times. Again, you think about one thing you mentioned in our pre-planning was the economic stimulus. Some of the biggest beneficiaries, maybe companies we're not thinking about that can profit from the economic growth. That's one of the things that the administration's touting that's going to help pay for this over time, is it's going to help stimulate the economy. It's going to make America more competitive, more opportunities for new businesses. But I think I really love the Berkshire one. Dude, I might hit on again because I don't think people understand its energy business, and this is the biggest take I took from Buffett's shareholder letter. This annual letter he wrote not too long ago, was when he described what used to be MidAmerican Energy, and as they've acquired NV Energy and other things and built it, now they call it Berkshire Hathaway Energy. The companies in the middle of this quarter century long projects where it's investing, basically all of its operating cash is being reinvested. 

The utility business is not paying any dividends, let's just think about that. They're not paying any dividends back to Berkshire, the parent company. They are investing all of that to build out transmission from the middle of the country where the wind and solar is going to be produced, to the coast where the population centers were consumed. They've already made this massive bet that the demand is going to be there without counting on the government's investing resources to build it out. I think that's a big thing. Then think about it, you mentioned BNSF. I want to say it again. We got to move a lot of the stuff around. You think about when the infrastructure is being deployed, BNSF is a big winner for helping facilitate all of the logistics of investing our infrastructure.

Sciple: Yeah. Jason, I think we've done a good job, laying out a few companies that can be beneficiaries of this government emphasis on infrastructure and whatever this plan looks like, I think these companies should get some benefit. Even if this bill totally falls apart, I think all the businesses that we listed can continue to operate profitably and deliver returns for shareholders, which ties into where I wanted to conclude this. When you think about investing, when there is some type of government catalyst or there's a law or regulatory change, how do you factor that into your thesis? How heavily do you weigh it in your thought process?

Hall: Well, I think it gets back to those Greek maxims. Help me out here, Nick, I'm drawing a blank here. I'm going to have to look them up now. I'm freezing up here. But the idea is that you can't go all or nothing in the idea that this is going to be a sea change and a massive winner. You have to invest in companies like the ones that we mentioned that are able to thrive without requiring government stimulus. An example that I used when we were prepping before the show was solar panel makers. You think about an industry that has seen huge demand growth for over a decade now and is expected to continue to deliver massive growth for years. There was a period, a decade, you've looked from 2010 through the end of 2019. SunPower, Canadian Solar, First Solar, from the beginning of that decade to the end, they lost, their stocks were down 67%, 23%, and 59%. Then you look at the chart and it's like a tidal wave of up and down and up and down because you have highly cyclical industries already. When you buy those companies is hyper important and those cycles, and the price you pay is hyper important. A big part of the thesis over that period was China is going to subsidize, the U.S. is going to subsidize, Europe's going to subsidize, and it didn't deliver unless you timed it well and you bought at the right period, and frankly, exited at the right period, which we all know were the two hardest things to do. Well, if you're trying to time the market, you may not have made money. Thinking about the companies that are strong across the cycles and even can thrive in the downsides of cycles, and not be reliant on government subsidies, that's the key.

Sciple: Yeah. I think for me, two points jump out. I've said this on the podcasts before and I had to learn it the hard way. Is, any thesis that's dependent on the government doing anything, is a bad thesis. There needs to be a thesis that can exist not withstanding the government doing anything. Because if the government can flip a switch and make your thesis work, they can flip the switch and make your thesis not work. Sometimes they're going to flip the switch the wrong way, and so you want to find a thesis that can exist independent of action from the government or government putting their blessing on something. 

Hall: Nick, the Greek maxim I was trying to find which says that surety brings ruin. It's the third of the Delphic maxims. If you count entirely on one thing, it's probably going to fail.

Sciple: Absolutely. Yeah, and I guess that's like anything that what can't go wrong will go wrong, all those things.

Hall: Eventually, yeah.

Sciple: The second thing I wanted to point out is, even if you are correct on the government action thesis, you need to understand that this thing takes time to percolate. One thing that taught me a good example is, a few years ago, there was a supreme court case that legalized sports betting. I know everybody knows sports betting is legalized now because you see ads every time you turn on your TV trying to get you to open up an account with these apps. But I think a lot of people expected sports betting to be legalized, and now all of a sudden that's going to run all over the country. A lot of those stocks pop for a day or two and then came down in a really significant way over the summer after that decision took place because we still needed states across the country to pass their own bills and then put in place their systems and laws and processes so that these companies can setup and comply and operate legally. 

We're going to see some of that same delay take place in this Biden infrastructure bill. Even if the bill passes, it's going to take some time to actually implement this stuff. There's not $2 trillion worth of projects ready to stick a shovel in the ground and start producing things. When you talk about building infrastructure and roads and bridges, there's going to have to go through a significant permitting process for all these local jurisdictions in order to actually get these projects done. Another thing to think about is just this isn't flip and switch and then overnight, all this money is flowing into the economy. It's going to be a little bit longer for this to play out, and so I think a lot of investors, intellectually want to say, "Well, the thing passed", so therefore, boom, the world changes. We need to understand what actually has to happen in the real world to go from a proposal that allocates these dollars to those dollars actually being spent in the real economy. That's the thing to keep in mind as well.

Hall: Yeah, absolutely. I think we've become so spoiled when we have companies like CrowdStrike and Zoom that can report 50%-300% revenue growth seemingly overnight just in the real world when you are talking about steel and concrete and laying fiber optics and those things. There's so much complexity and there's so many people involved and it does take time. It really does take time.

Sciple: Yeah. I think for me, Jason, maybe final thoughts on this is the Infrastructure Bill. I think the takeaways for me is this is a huge opportunity, there's going to be lots of dollars spent to get our infrastructure up to speed, and some companies are going to capture that and deliver meaningful returns for shareholders. We don't know the form this bill is going to take. We don't know how long it will take for these dollars to be spent. But we know this is a problem that needs to be solved and there's going to be companies that are out there trying to solve it one way or the other.

Hall: Yeah. My follow up to that is that I think it's a great win for society. As an investor, if you're really looking to profit from infrastructure, frankly, you're probably better off looking at companies that are built to succeed in infrastructure internationally, which is one of the things that brings me background to Brookfield Infrastructure, and then companies like American Tower. Because infrastructure growth is going to be happening around the world, whether Congress does anything or not, and those companies were built to succeed in multiple markets. They know how to operate. They know how to allocate capital. Again, the companies that have been the winners are probably going to continue to be the winners.

Sciple: Absolutely. Jason, it's so great to have you back on the podcast. I've missed having you on the show. We need to do this again sooner.

Hall: Me too. I agree. You know where to find me.

Sciple: I'll be in touch. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show, for Jason Hall, I'm Nick Sciple. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.