The need to maintain and upgrade infrastructure isn’t going away anytime soon, and the promise of an infrastructure bill adds a growth accelerator to these three stock choices. Let’s see why a sustainable water company Xylem (NYSE: XYL), infrastructure consulting AECOM (NYSE: ACM), and metal coating company AZZ (NYSE: AZZ) worth buying to play the theme of infrastructure spending.
The investment case for the purchase of AZZ is based on the company’s efforts to refocus its core business, namely the galvanizing of metal. The metal cladding segment generated $ 107 million in adjusted operating profit in its 2021 fiscal year, compared to just $ 15.7 million for infrastructure solutions (enclosure systems, switchgear, electrical products and lighting systems).
For reference, galvanizing is the process of galvanizing steel or iron to keep it from rusting. As such, any infrastructure expense that results in increased construction spending is good news for AZZ. The company operates at 39 galvanizing sites in North America and is the largest player in the market.
In addition, management plans to pursue its acquisition strategy (eight targeted acquisitions made since 2017) to develop the metal coating business. This makes sense given that the metal coatings segment has an operating profit margin of between 21% and 23%, compared to the infrastructure solutions segment margin in the low to mid range. In fact, management is conducting a review of the infrastructure solutions business with a view to exiting some of the worst performing businesses.
Altogether, AZZ is expanding into its core high-margin metal coating business and is focusing on restructuring its low-margin infrastructure business. This is a sensible strategy that positions the company well for a recovery in infrastructure spending.
Infrastructure consulting is also undergoing restructuring. Having divested many of its secondary businesses (including electrical construction, civil construction and management services), consolidated its business regions, and simplified its business structure, AECOM is now well positioned for expanding infrastructure spending.
Following the divestitures and restructuring, AECOM is now focusing on its core competence in infrastructure. It currently generates 35% of its turnover in transport, 34% in installations and 28% in environment / water. Thus, the company will benefit from global infrastructure spending, whether it is an infrastructure bill in the United States or the need to increase development spending in emerging economies.
AECOM’s management aims to double its adjusted profit and free cash flow from 2020 to 2024, with an operating margin rising to 15% in 2024 against 13.1% at the end of the first quarter of 2021. In d ‘ In other words, management expects adjusted earnings per share. (EPS) of $ 4.30 and free cash flow of at least $ 680 million by 2024.
Based on its current market capitalization, these numbers would put the stock at 14 times its free cash flow and 15 times its profit in 2024. An infrastructure bill in the United States could advance these goals – something that investors need to watch. .
This sustainable water products business is an intriguing blend of solid end demand from water utilities and cyclical demand from industrial, commercial and residential customers. Meanwhile, underlying all of this, the company has a long-term growth opportunity through the growth of its smart infrastructure solutions, known as advanced infrastructure analysis (AIA). Xylem’s AIA solutions include web-connected smart meters and leak detection technology that help utilities diagnose, monitor and control issues such as leaks, theft or inaccurate billing.
About 55% of its turnover comes from water services (which are notoriously slowly adopting new technologies), with a 50/50 split between wastewater and clean water treatment (pumps, filtration, valves, orders, etc.). Industrial customers (water treatment) contribute around 30% of turnover, commercial (10%) and residential (5%) constituting the remainder.
Xylem’s long-term outlook will be determined by the ongoing spending on water treatment by water utilities and how quickly they (water utilities) adopt its AIA solutions. The continued need for water motivates the former, and the latter is a matter of “when not if”.
Trading 44 times the estimated 2021 earnings, Xylem is not a value stock, and cautious investors may want to wait for a better entry point. On the other hand, its long-term growth outlook looks excellent and if the adoption rate of AIA accelerates, earnings estimates will likely be revised upwards.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.