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The myth of the coming infrastructure boom

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January 21, 2009 – Comments (5) | RELATED TICKERS: CBI , FLR

 

It seems as though one can't pick up an investment magazines, click on a business website, or watch CNBC or Bloomberg right now without coming across some sort of story about how the new government stimulus package aka the “American Recovery and Reinvestment Bill of 2009″ is will be a tremendous boon to infrastructure companies.  While I certainly think that the companies in this sector will do better with the passage of the proposed stimulus package, I think that many people are overestimating the impact that it will have on them.

Take a look at the above chart.  A very small percentage of the total $825 billion package will actually go directly to infrastructure projects.  Some of the largest chunks of the package have absolutely nothing to do with infrastructure, such as:

- $275 million in tax cuts - this is the part that I personally like the best

- $87 billion is for a temporary increase in the Medicade matching rate - this is nothing more than printing money to prop up a slowly dying program.

- $79 billion in state fiscal relief - one might be able to argue that some of this might be spent on infrastructure, but given the dire shape that most states are in I suspect that this will at best let them tread water...not start massive new projects.

- $43 billion for increased unemployment benefits - no building here

- $41 billion for local school districts - I actually like the fact that money is going to schools, not just because I am a father with two young sons, but also because better education helps the country build for the future.  I have to wonder how much of this money will be used to actually build anything.  I suspect that the bulk of it will go to pay teachers and pay for supplies.

- $39 billion in healthcare for newly unemployed workers - no building here

- $20 billion for food stamps - no building here either

- Of course let's not forget the missing $31 or so billion that seems to be unaccounted for

So what is being spent on infrastructure then?  Let's see, there's:

- $32 billion to "transform the nation's energy transmission, distribution, and production systems"

- $31 billion to modernize federal and other infrastructure

- $30 billion for highway construction

- $19 billion for clean water, flood control, and other restoration investments

- and a bunch of other smaller pieces of the pie.

All told, I estimate that only around $144 billion of the total $825 billion package will be spent on actual infrastructure projects.  That represents just 17% of the total pie.  After one factors in the fact that these projects are spread out over a number of different sectors (roads, energy, water, etc...) and adds in the fact that corruption and waste at the government level (which is a large, inefficient beast) will sap a chunk of the spending what is left for individual companies?  Will it be enough to offset the loss in private spending that was fueled by a massive leverage boom over the past two decades?  I personally have my doubts. 

I guess that the point of this post is that while the theory that the stimulus package will be a massive boon for infrastructure companies sounds good at first, it isn't nearly as promising when one takes a closer look at it.  The government spending will certainly help some, but many of these companies have already rallied quite a bit since the announcement of this plan.  I personally would not be a buyer of infrastructure companies at this point.

Deej

Note, I am long small positions in both Chicago Bridge and Iron (CBI) and Flour (FLR), but both were purchased a long time ago.

5 Comments – Post Your Own

#1) On January 21, 2009 at 3:14 PM, JakilaTheHun (99.93) wrote:

I'd rather wait for the public to sour on infrastructure stocks a little more before buying, but many of the infra stocks are so beaten down right now, that they are values anyway. 

X and ABB both look really beaten down to me no matter how you slice it.  VE's another nice one if you don't mind a high leverage play.  Really, $100 billion+ in US infrastructure spending is still pretty good --- I wouldn't buy solely because of that, though, but it is a nice bonus. 

In any case, good research.  I always find your blogs full of useful info.

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#2) On January 21, 2009 at 3:18 PM, Wraithlok (48.90) wrote:

Gah!  I was going to totally post something on this and was trumped by you! :)

I agree 100% and thus far have steered away from infrastructure stocks until we are defintely in the clear in terms of the recession.  

Let us not forget another factor;  even if this stimulus package is passed through there are still months and months of government red tape to sort through in terms of what PROJECTS will actually be funded. 

I work in the government right now and can tell you without a shadow of a doubt you are going to see some serious delays on these projects even with the presidential "push".   Keep in mind there are hard rules to go buy in terms of actual timelines spent for bidding, receiving, and implementing these funds.   Projects are not funded usually with a straight up money dump; usually they are performance driven and are fiscally trickled into a project at certain stages.

Of course even if there is a relatively smooth project proposal /acceptance period you are still looking at several months of bid, review, acceptance.  

 My last shot across the bow.   Please keep in mind as well that the 17% is the money allocated... out of that we will probably only see about 12-13% used (if that).  The rest (if they are smart!) will be set aside for contingent fees and cost overruns.   Of course that is in the perfect world...   any bets on if we see a "gee we underestimated costs can we have another bailout"

 

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#3) On January 21, 2009 at 3:33 PM, Gemini846 (50.01) wrote:

Couldn't one argue that dispite what he said in his address yesterday a bridge project could do one span with the money and then come back with the pony up or it doesn't get done gig? The money might not come from the stimulus but it will get spent one way or another. Print Print Print...

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#4) On January 21, 2009 at 3:45 PM, DemonDoug (81.27) wrote:

yup, i've also changed my mind on the infrastructure investing theory.  ABB I think is the one good play because they are big in upgrading the grid/power transmission lines IIRC.

FLR will be okay, as far as a big infra company, I can still recommend only one and that is SI.  I wouldn't mess with CBI although they can do well if they get they can trim down and get their finances under control

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#5) On January 27, 2009 at 2:31 AM, tonylogan1 (28.00) wrote:

They really do get creative in finding ways to waste money. Very good post, I had not considered how over-rated this bailout will be on infrastucture.

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