- The rising potential for a US government-funded package
- Putting the unemployed back to work
- Lots of government contracts on the horizon
- ROAD is a company in the infrastructure sweet spot
- Rising revenues could get turbocharged in 2021 and beyond
We have heard the calls for a massive government-funded package to rebuild and repair America’s crumbling infrastructure for years. Republicans and Democrats have all expressed support for a package. After the 2016 election, hopes increased that President Trump’s experience as a real estate developer would lead to initiatives to upgrade and improve bridges, tunnels, roads, airports, railroads, government buildings, schools, and other infrastructure areas. It is ironic that the task now falls to leadership without that experience. Political wrangling over the past years precluded the long-overdue program. It has been almost seventy years since the last government-sponsored building project. The Eisenhower administration in the 1950s built the interstate system of roads. In the 1930s, President Franklin Delano Roosevelt’s New Deal addressed high unemployment levels in the wake of the Great Depression.
In 2021, the US will hopefully emerge from the global pandemic. While the vaccines should create herd immunity, the financial fallout will remain as a legacy for years to come. It may be the best time in decades for the incoming administration to finally roll out an infrastructure package to create jobs, provide government contracts to struggling businesses, and repair and rebuild infrastructure. A program would have wide-ranging benefits for the overall economy, including increasing tax revenues on the local, state, and federal levels.
Construction Partners, Inc. (ROAD) may not be the leading company that benefits from an infrastructure program. However, an increase in construction projects in the Southern US states would lift ROAD’s earnings and shares. The stock is likely to rise as with the prospects of a program.
The rising potential for a US government-funded package
Digging out of the global pandemic’s rubble will be the next order of business in the US after vaccines establish herd immunity and the health threat declines. On January 20, President-elect Joe Biden will take over in the Oval Office. The incoming administration will have its hands full when dealing with the virus’s financial fallout.
A tidal wave of central bank liquidity and low-interest rates and a tsunami of government stimulus address the short-term concerns and have provided some economic stability. The virus may fade in our memories, but the massive price tag will remain a growing concern over the coming years. The US deficit is approaching the $30 trillion level. The money supply has swelled to unimaginable levels. The stage is set for a government-sponsored package that jumpstarts the economy of individuals and businesses.
Putting the unemployed back to work
US unemployment had reached the lowest level since the 1960s before the pandemic caused chaos. At the end of 2020, the rate was at 6.7%, after a 3.5% rate in February 2020. Approximately 12.6 million people are currently unemployed, many of which lost their jobs because of COVID-19. The real rate of unemployment is likely far higher as we head into 2021.
The government stimulus and social welfare programs are short-term band-aids for the unemployed and underemployed in the US. Putting people back to work requires a substantial federal jobs program. The most likely candidate would be a long-overdue project to rebuild infrastructure. A nation-wide construction project would require labor and raw materials. While the costs will be substantial, the tax revenues, improvements, and rising tax rates on higher-income individuals and corporations could offset at least some of the expenses. Moreover, job creation will increase the overall tax base.
Lots of government contracts on the horizon
Struggling businesses would benefit from government contracts that support an infrastructure project. Aside from the direct impact for construction-related companies, a falling unemployment rate would increase consumer spending and cause default rates to decline. Meanwhile, businesses that service workers and construction projects would thrive as a government program jumpstarts the economy throughout the US.
The most direct benefit will go to those companies directly involved in infrastructure construction. Construction Partners, Inc. (ROAD) is one of the companies that stand to profit, and its shares have been trending higher since 2018.
ROAD is a company in the infrastructure sweet spot
Construction Partners, Inc. (ROAD) constructs roads and conducts maintenance in the Southern US states. The company has business in Alabama, Florida, Georgia, and the Carolinas. ROAD is positioned right in the heart of the sweet spot for infrastructure building and rebuilding as it focuses on highways, roads, bridges, airports, and commercial and residential developments. The company has been in business since 2001, with headquarters in Dothan, Alabama.
ROAD does not have the most compelling fundamentals when compared to its peers.
Source: Seeking Alpha
The chart shows that Quant rankings for the company put it in the middle of the pack of the other industrial companies specializing in construction and engineering.
Source: Seeking Alpha
Meanwhile, Quant and Wall Street analyst ratings are bullish for the prospects of ROAD shares.
As of January 7, the stock traded to an all-time high of $33.91. At over $33 per share, ROAD has a market cap of $1.728 billion and trades an average of 235,342 shares each day.
Rising revenues could get turbocharged in 2021 and beyond
ROAD posted profits over the past four quarters, exceeding or meeting analyst estimates in three.
Source: Yahoo Finance
The chart shows that the consensus EPS forecast for Q4 2020 is currently for 12 cents. The trend in revenues and earnings has been positive over the past years.
Source: Yahoo Finance
The chart highlights growing revenues and stable earnings from 2017 through 2020.
Source: Yahoo Finance
The company has maintained the bullish trend over the past four quarters.
Meanwhile, the price action in ROAD shares remains in an upward trend.
The chart illustrates that the stock has made higher lows and higher highs since late 2018. ROAD was trading at a new record high on January 7, 2021.
Many are dubious that the US government will get its act together when it comes to infrastructure rebuilding anytime soon. I believe that they have little choice given the high level of unemployment and a sluggish economy that will continue after vaccines establish herd immunity to the coronavirus. ROAD may not be the most compelling choice in the construction sector. However, the stock is likely to continue to make higher highs if government contracts to rebuild infrastructure in the southern US states materialize in 2021 and the coming years.
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ROAD shares were trading at $33.50 per share on Thursday afternoon, up $1.22 (+3.78%). Year-to-date, ROAD has gained 15.08%, versus a 1.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
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