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Granite Construction Inc. Poised to Benefit From FAST Act

By A.J. Tiarsmith - Jan 14, 2016 at 2:20PM

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How to take advantage of Obama's $300 billion gift to the transportation infrastructure sector.

The transportation infrastructure sector received some good news when President Obama signed the five-year, $305 billion Fixing America's Surface Transportation, or FAST, Act on December 4. The bill includes $225.2 billion from the Highway Trust Fund, which represents a $20.2 billion increase over maintaining current funding for the five-year life of the bill. The increased spending comes as welcome news to construction companies such as Granite (GVA -0.68%), engineering services companies such Jacobs Engineering (J -1.67%), as well as heavy machinery companies such as beleaguered giant Caterpillar (CAT 0.12%).

Which company is best positioned to take advantage of this $300 billion windfall?

The gift of stability
The stability provided by a five-year bill is perhaps even more welcome news than the increased spending. Highway funding for the past several years has been characterized by short-term extensions. The challenge with short-term extensions is that they create uncertainty that makes it difficult for states to commit to large-scale projects.

In Georgia, for instance, Transportation Commissioner Russell McMurry has indicated that 329 projects totaling $715 million were being held up because of uncertainty over federal funding. Similarly, in 2015, Arkansas suspended 70 projects worth $282 million.

This uncertainty has negatively affected engineering services and construction companies that rely heavily on government contracts. It also indirectly impacts manufacturing equipment companies since large-scale equipment purchases can only be completed once a government contract has been secured. With the signing of the $305 billion FAST Act, this uncertainty is removed, and these large projects can move forward. Implementing these projects should be a boon for engineering services companies, construction companies, as well as heavy machinery companies.

Why Granite is a winner of FAST
Granite is highly dependent on public infrastructure spending, with 75% of the company's revenue generated from federal state and local government contracts. In 2014, the company generated $1.2 billion in revenue from its non-large-scale construction segment, which represents 52% of total revenue. Granite describes the non-large-scale construction segment as being completed within two years, with contract values typically less than $75 million. In this way, the company is positioned to benefit from any increase in infrastructure spending. However, the non-large-scale construction market is highly competitive with low barriers to entry and characterized by a range of competitors from small local companies to large national and international construction companies. This intense competition could limit the upside potential in the non-large-scale construction market.

Where Granite really seems poised to shine is in the area of large-scale projects. Large-scale projects are defined as contracts in excess of $75 million that can last longer than two years. As noted above, many states will now be bidding large infrastructure projects that were on hold because of uncertainty in federal funding.

Large infrastructure projects are complex and present a barrier to entry to many of the smaller companies that compete in the sector. Granite's size and experience completing large-scale projects could allow it to take advantage of this expected increase in large projects. In 2014, large project construction made up 36.3% of Granite's revenue, and Granite has already announced plans to bid for $16 billion in large projects. Granite's ability to compete for these large-scale projects should allow it to take advantage of the opportunities presented by the FAST Act.

A pure play
In anticipation of the bill, investors have bid up several stocks in the sector in the last few months. Shares of Granite for instance, are up over 25% from a low of $29.12 on October 1. Shares of Jacobs jumped from $36.65 at the end of September to $44.96 in the week before the bill was signed. So, why is Granite the best bet to keep the good times rolling? Granite is a pure play -- so if you want to bet directly on the positive impacts of the FAST Act -- Granite is a good way to do it. 

The major players in the transportation infrastructure sector tend to be highly diversified multi-national companies. Jacobs, for instance, has offices in six continents and provides engineering services to clients in a wide variety of industries in addition to transportation, including: oil and gas exploration, production, and refining; chemicals and polymers; infrastructure and telecommunications; mining and minerals; pharmaceuticals and biotechnology; and technology and manufacturing, among others.

Similarly, heavy equipment giant Caterpillar sells machinery on six continents and serves customers in multiple industries, including mining and minerals, transportation infrastructure, energy, and oil and gas exploration, among others.

If you are looking to make a pure play on the benefits of the FAST Act, Granite is a good way to do it. Certainly, there is nothing wrong with serving customers in a wide variety of industries across the globe. The point is simply that each of the major segments of Granite's business -- construction, large-project construction, and construction materials -- are poised to directly benefit from the signing of the FAST Act. Whereas the benefits to companies such as Caterpillar and Jacobs are more diffuse. So, if you want to make a direct bet on the benefits of the FAST Act, Granite is a good way to do it.

For years, investors watching the infrastructure space have been burned by the insecurity of short-term spending fixes. Granite is poised to be a beneficiary of the stability provided by FAST.

A.J. Tiarsmith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
$186.03 (0.12%) $0.22
Jacobs Engineering Group Inc. Stock Quote
Jacobs Engineering Group Inc.
$123.80 (-1.67%) $-2.10
Granite Construction Incorporated Stock Quote
Granite Construction Incorporated
$30.69 (-0.68%) $0.21

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