With multiple interest rate cuts on the horizon, now’s the time to rotate back into infrastructure stocks.
Low borrowing costs following rate reductions foster a positive financial landscape for funding expansive infrastructure projects. This shift makes it more cost-effective for companies to undertake or expand infrastructure developments. Consequently, we’ve seen renewed interest in the sector ahead of the potential first rate cut in September.
Furthermore, the U.S. is leveraging the Infrastructure Investment and Jobs Act to significantly upgrade its transportation, digital services, and clean energy infrastructure. Also, massive funding is underway to improve the speed and reliability of passenger rail, while airports receive substantial funding for modernization.
Hence, with inflation going down at an encouraging pace in recent months and the likely stabilization in interest rates, it’s an excellent time to wager on the best infrastructure stocks. These stocks, in particular, hold significant upside potential backed by superb fundamentals and near-term prospects.
United Rentals (URI)
United Rentals (NYSE:URI) is a globe-trotting titan in the equipment rental space that shines as one of the best infrastructure stocks to buy. With its expansive network spread across the North American region, URI has become a bellwether in construction equipment rentals, catering to projects of all sizes.
Over the years, it has been a tremendous wealth compounder, outperforming the broader market over multiple periods. It generated an eye-catching 465% return over the past five years, dwarfing the S&P 500’s 80% gain. Similarly, in the past year alone, it surged 59%, beating the S&P 500’s 19% jump.
Its superb results have everything to do with its consistent business, which continues to produce a gusher of cash flows. Its levered free cash flows currently stand at an impressive $2.9 billion, 250% higher than its 2014 balance of $832 million. Moreover, its top and bottom line continues to grow by double-digit margins, recently posting its 5th consecutive earnings beat with its second-quarter (Q2) results
Limbach Holdings (LMB)
Limbach Holdings (NASDAQ:LMB) is a leading player in the construction and renovation industries. The firm’s expertise in its niche has helped build a sturdy business, transforming it into a remarkably rewarding stock. Over the past year alone, LMB stock has returned more than 140% in gains to its shareholders.
In recent quarters, LMB has shifted its focus from General Contractor Relationships (GCR) to the more lucrative Owner Direct Relationships (ODR). The goal is to raise ODR’s contribution to overall sales from 62% to 70%, focusing on higher-margin contracts. Consequently, the firm’s year-over-year (YOY) profitability metrics eclipse historical averages by double or even triple digits.
Furthermore, it has pursued mergers and acquisitions and launched new products to grow its revenue base. For instance, the acquisitions of ACME Industrial and Industrial Air are already having a meaningful impact and are expected to contribute $5 million in incremental EBITDA this year.
Caterpillar (CAT)
Caterpillar (NYSE:CAT) is arguably the biggest name in the construction and mining equipment space. With its bellwether status in its niche, the firm has significantly benefitted from the growing demand for machinery. Over the years, it has proven remarkably effective in navigating market fluctuations while maintaining robust financial health.
Last year, Caterpillar was particularly impressive, posting record revenues of $67.1 billion and an adjusted EPS of $21.21. These numbers represented double-digit improvements on a YOY basis, underscoring its robust growth trajectory.
The same explosiveness is unlikely this year, but its financials remain robust, with a well-covered dividend. Speaking of dividends, the company just bumped its payout by 8.5%, having grown its payouts over the past 30 years.
Additionally, it yields an excellent 1.64%, with an annual payout of $5.64. Moreover, with 489 million outstanding shares, its free cash flow base exceeding $7.4 billion more than covers its dividend obligations.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
