This Cheap Stock’s Future Looks Bright

Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.

The Biden Administration is just the latest administration to talk about the need to upgrade our country’s infrastructure in order to remain competitive globally.

The White House has proposed more than $2 trillion of spending on U.S. infrastructure over the next decade, but so far, Congress has done nothing.

Some headway has been made on a slimmed-down bipartisan deal that would include $1.2 trillion of spending over the next eight years. The proposed package contains a $109 billion investment in roads and bridges.

As negotiations over the infrastructure deal continue, the Surface Transportation Reauthorization Act of 2021 is in the works as a successor to a previous five-year federal highway spending program. It proposes $304 billion of investment in roads and bridges over the next five years.

We will have to see if anything results from this latest attempt. U.S. infrastructure is certainly in dire need of improvement.

The American Society of Civil Engineers (ASCE) rates the condition of our country’s infrastructure as a C-. Just to improve this poor grade to what the organization says will be “adequate for now,” ASCE estimates that almost $6 trillion of investment will be needed by 2029. So far, only $3.4 trillion of the $6 trillion is currently funded.

I suspect some sort of increased spending will occur. Even if it’s only a bump up in the funding for the Surface Transportation Reauthorization Act of 2021.

That bodes very well for the largest asphalt paving company in the U.S. Let me introduce you the Irish company, CRH PLC (CRH).

CRH PLC

CRH PLC (CRH) is triple listed in Ireland, London and on the New York Stock Exchange. The company is a maker and supplier of all types of building materials. It enjoys leading positions in both North America and Europe, operating in 29 countries.

CRH provides aggregates such as granite and limestone, as well as asphalt, cement, concrete, and paving. Its products are used in everything from roads and bridges to schools and houses. The company has three divisions: Americas materials, Europe materials, and building products.

The Americas materials business is largely US-focused and accounted for 41% of CRH’s total revenue and 52% of its cash profits (Ebitda) last year. With half of CRH’s sales derived from infrastructure projects, this is CRH’s highest margin segment. In fact, the cash profit margin expanded by 2.6% during the pandemic in 2020, to 21.3%. So, while the division’s revenues fell by 3% to $11.3 billion, profits actually jumped by a tenth to $2.4 billion.

The Europe materials business generated a third of CRH’s revenue and 23% of its cash profits in 2020. Profits from this division dropped by 13% last year to $1.1 billion, as building activity in Western Europe—and especially in the UK—was affected more severely by the coronavirus pandemic.

The remainder of the company’s earnings come from its building products segment, which provides architectural products and window glazing. It is CRH’s fastest growing business; profits have risen by 10% annually over the past five years.

CRH: “Paving” Its Way to Profits

At first glance, you would expect a business like CRH to be highly cyclical because of its exposure to any downturn in construction activity; however, the company is much better able to cope with a recession than it was when the global financial crisis struck.

As CRH’s CEO Albert Manifold explained in a presentation: “We have made a conscious decision to move our business more and more toward the publicly funded construction area. [W]e’ve done so because it’s more resilient in the down cycle, and it’s largely infrastructure. Governments tend to fund construction and infrastructure through the cycle and within [the] cycle.”

He’s right. In fact, governments often increase their spending on infrastructure projects during a recession to boost employment. And CRH is positioned for that expected rise in spending. Publicly funded construction now accounts for around 50% of CRH’s sales. Another 40% comes from the resilient repair, maintenance and improvement market.

CRH first entered the U.S. market in 1978 through the acquisition of concrete products company Amcor and now operates across 46 states. It is currently focusing on the higher-growth southern and western states, where rising populations are fueling demand for buildings and building materials.

And as I mentioned previously, CRH is the largest asphalt paving company in North America. And it is currently the joint leader in U.S. aggregates alongside Vulcan Materials (VMC). It also provides things like concrete piping for water drainage. It would certainly benefit from any increased funding for roads.

While CRH is headquartered in Ireland, its future is certainly here in the United States. The Americas accounted for around 60% of the company’s profits in 2014, and analysts estimate that this will rise to 70% in 2021 and 80% by 2025.

As an aside: despite the business CRH is in, the company is moving toward carbon neutrality. For example, it is increasing its use of recycled materials, which now accounts for 25% of every mile of road it builds in North America.

CRH’s Bright Future

The company is doing so well that management projected that profits for the first half of this year will be “well ahead” of the $1.59 billion recorded in same period last year.

CRH’s stock has bounced back strongly from its pandemic low and are hovering around an all-time high. Yet the stock is still cheap, currently trading at 16 times consensus 2022 earnings. With the US economy growing and more infrastructure spending likely on the way, CRH looks like a good buy.

— Tony Daltorio

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Source: Growth Stock Advisor