Bull Sectors

I am getting more and more excited about two intertwined sectors every day. They are infrastructure and steel. Infrastructure companies design and build the world’s biggest and most complicated projects: power plants, bridges, oil drilling, pumping and refining facilities, pharmaceutical research facilities. I posted some of my picks in this sector in a previous Bull Stocks post but feel it necessary to expand on it.

Infrastructure companies have many catalysts right now. The energy sector is expanding on multiple fronts. In the search for more oil, refiners are building more and more refineries that can handle heavier (dirtier) crudes than previously. This isn’t a simple upgrade, it involves building a whole new, more complicated, more expensive refinery. The price tag? Up around $7BN. We are going to see more of these refineries continue to go up because they improve the crack spread for oil refiners. The crack spread is the difference between what refiners pay for a barrel of oil and what they charge for the gasoline. Dirtier crude is a cheaper input. Infrastructure companies will see some big orders from this trend.

Additionally, the search for oil is taking us to increasingly difficult places to drill. The apparatuses with which drillers tackle these environments are often constructed by these infrastructure companies (MDR is very concentrated in this area).

Beyond oil, there are four very specific catalysts: Brazil, Russia, India, China. These, the “BRIC” countries, are building infrastructure to support their newfound place on the world economic stage. Think about how much power China and India require to get it to all their citizens. This mean infrastructure companies building nuclear, gas and coal power plants. Also, think about these countries building roads, large buildings, and how much companies there are expanding.

Beyond BRIC there is another geographic catalyst: Dubai. All the huge projects and big ambitions of Dubai rely on very heavy construction. The oil dependent countries are desperate to create economy outside of oil which results in fast expansion of infrastructure.

To back up the infrastructure thesis I reference GE’s earnings today. GE missed because of their financial sector. Their infrastructure revenues were up 23%. If you’re looking for ways to play infrastructure, my favorite is Foster Wheeler (FWLT). FWLT is down on missed earnings last quarter but remember, these companies do big projects of a wide variety, meaning different margins. Therefore, earnings are lumpy, so if a company has a good historyand good management, it’s generally a great opportunity to buy on the dips. Other major international infrastructure companies: ABB, MDR, JEC, SGR, URS, FLR. Another interesting play with a well run company: Manitowoc (MTW), 70% of their revenue comes from being one of the world’s biggest crane manufacturers.

The side effect: steel. Steel prices are going way up as a result of all the infrastructure reasons we just talked about. We’re a little late on this if you look at the chart of any major steel company but there still may be a decent way to go. Major Steel companies include: X, MT, AKS.

Steel companies are also facing a major problem in rising input costs. This makes vertically integrated MTL, a Cramer pick on Monday, very interesting. I have yet to have the time to do my full due diligence on this but it’s definitely an intriguing situation.