Metal coating company AZZ (AZZ 6.51%)nfrastructure consultancy AECOM (ACM 0.31%), and positioning technology company Trimble (TRMB 0.46%)are three very different companies. However, they have two big things in common: They have heavy exposure to infrastructural spending, and they all have company-specific "growth kickers," which could lead to improved revenue and profit growth in the coming years. Let's take a look a why they are fascinating companies for investors.
Now I know what you are thinking. How can a company whose main activity is galvanizing steel be interesting? The answer lies in the fact that galvanizing steel is a relatively high-margin business, and AZZ is the leading player in the U.S. In other words, its 21% to 23% operating margin in its metal coating segment should be sustainable.
For reference, the metal coatings business generated $106.7 million in earnings in its fiscal 2021 with an adjusted operating income margin of 23.3%. In comparison, its infrastructure solutions business (electrical products and welding services to refiners, utilities, and oil and gas) generated just $15.7 million in earnings with a 4.1% margin.
Moreover, management plans to consolidate the industry by making synergy-enhancing acquisitions. The new emphasis on its core business is highlighted by the disposal of AZZ's nuclear logistics business in 2020 and the purchase of ACME Galvanizing in January 2021.
It's a strategy that could pay off handsomely if infrastructure spending takes off in the coming years. CEO Tom Ferguson noted on the earnings call, "Almost any infrastructure spend is good for our Metal Coatings business." He went on to add that, "When it comes on the electrical, power gen and transmission, distribution, we know the grid has to continue to be updated and expanded." As such, AZZ has an opportunity to benefit from any significant increase in spending from an infrastructure bill.
The engineering design consultancy and construction management company continues to look like a good value. Partly in response to the involvement of an activist hedge fund, Starboard Value Acquisition Corporation, management has restructured the company in an attempt to focus on its core competency, namely infrastructure. As such, management sold its management services and power construction businesses in 2020 and its civil construction business in early 2021.
The idea is to improve margin and free cash flow generation. Management believes it can double its earnings and free cash flow by 2024; it has a target of adjusted earnings per share (EPS) of $4.30 and free cash flow of $680 million by that date. Those figures would put AECOM on a price-to-earnings multiple of fewer than 16 times earnings in 2024 and less than 15 times its free cash flow at the same time.
The pathway will be made a lot easier to traverse, given an infrastructure bill -- and particularly as the proposed spending includes areas of AECOM expertise such as clean energy, transportation, and facilities.
The industrial technology company plays a pivotal role in helping companies with positioning. This may seem simple enough. Still, consider the pinpoint accuracy that an engineering contractor needs when constructing a frame or building a pipeline, or how farmers are using smart technology to precisely navigate their fields, or even how truck companies monitor their fleets in real time. These are specific end-markets for Trimble's positioning technology as it grows out of its traditional end market of geospatial mapping and surveying.
Management argues that its solutions are moving toward being part of its customers' "integrated work process." Examples of this principle include fleet service management for trucking companies or precision guiding agricultural machinery. In doing so, the company is likely to grow its software and recurring revenue more than its hardware.
That's important, because Trimble's software and recurring revenue tend to come with much higher profit margins. As such, Wall Street analyst forecasts have Trimble expanding operating margin over time while growing sales at a mid- to high-single-digit rate. Consequently, it's not hard to see Trimble growing earnings at a double-digit rate over time. Throw in an infrastructure bill to stimulate the company's end markets, and Trimble has the potential to grow strongly for many years to come.