Once again, the political landscape is promising to increase spending on infrastructure to rebuild our cities, improve our air and water quality, stimulate the economy, and otherwise improve the quality of our lives. This promise has been made often, and while it is hard to dispute the need for such enhancements, little has changed to improve our situation.
Once every four years, the American Society of Civil Engineers produces a comprehensive assessment of the nation's major infrastructure categories in the ASCE's Report Card for America's Infrastructure. The last report card was issued in 2013. At that time, America's cumulative grade for infrastructure came in at a D+. In the time that has passed since it was issued, public construction spending as a percentage of GDP has declined precipitously.
It should be noted that infrastructure encompasses a broad area, including transportation and water (primarily publicly financed), and telecommunications and electricity distribution (primarily privately financed). Given the real need to spend to improve infrastructure across the world, many diverse companies, such as General Electric Co. (ticker: GE) and Martin Marietta Materials (MLM), should benefit from an increase in spending.
General Electric is one of the largest and most diversified industrial firms in the world, with products and services ranging from aircraft engines, power generation, water processing and household appliances. While the advanced economies of the world have largely committed to clean energy, China and India have also concluded that clean energy is in their best interest. First, clean energy can reduce a country's energy imports. Second, clean energy and electric vehicles can dramatically improve air quality in densely populated Asian cities, such as Beijing, Shanghai and New Delhi. Finally, companies like Apple (AAPL) are increasingly demanding that their suppliers source their power from clean energy sources, so export dependent countries need to upgrade to a clean energy infrastructure to maintain their competitiveness.
According to the International Energy Agency, renewables and natural gas generation will be the two fastest-growing sources of power generation by 2040. General Electric generates one-third of the company's revenues and profits from power, water, renewable energy, oil, gas and energy connections. Tangentially the rail transportation and aviation segments stand to benefit from upgrades to lower emission engines.
Wall Street analysts are projecting long-term earnings per share growth of 9.6 percent for General Electric versus 6 percent for the Standard & Poor's 500 index. General Electric offers a 3.25 percent dividend yield, which also should grow with earnings over time. The company has invested aggressively in big data and 3D printing to help manage their costs, improve the quality of their products, and most importantly, to help predict product reliability issues on behalf of their clients to better manage downtime.
General Electric has invested well ahead of their competitors in predictive analytics, which may lead to market share gains over time and an expected earnings growth rate in excess of current consensus of 9.6 percent.
After several years of 4 percent growth from 2002 to 2015, public sector infrastructure growth is expected to accelerate to 6 percent by 2020. With strong bipartisan support, Congress recently passed the Fix America Surface Transportation Act in December of 2015 to shore up highway spending for the next five years. A prime beneficiary of this spending is Martin Marietta Materials, the second-largest producer of aggregates products (crushed stone, sand and gravel) in the U.S. The firm's aggregates business also includes asphalt products, ready mixed concrete and road paving operations.
Martin Marietta revenues from the public sector generate approximately 40 percent of sales. The nonresidential sector generates an additional 31 percent of sales and is well positioned in faster growing states. Residential generates 19 percent of sales and should benefit from the tremendous pent-up demand for single-family homes after the financial crisis. Macro drivers aside, Martin Marietta has strategically located its mines in the lower half of the U.S. to benefit from this region's population growth and relatively low transportation costs. Furthermore, because of limited competition, the company could raise prices as demand increases.
Overall, Martin Marietta is expected to generate 10.2 percent annual revenue growth and 30.4 percent EBITDA growth through 2020. The company pays a $1.60 per share dividend, which is likely to grow 5 percent per year. The company will also be using free-cash flow plus debt to aggressively repurchase stock. The stock is currently trading at 22.8 times next 12-month earnings and 17 times 2018 earnings.
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