Stimulus: No quick fix for stocks
The government's spending package promises billions for builders and equipment-makers - but it's not a cure-all for industry woes.
NEW YORK (Fortune) -- The word "infrastructure" was once used mainly by SAT tutors and civil engineers, but now it's this year's hot investing theme.
When word spread in December that President Obama's stimulus package would pour billions into rebuilding the country's roads, bridges, and schools, investors began prowling the market for infrastructure plays.
Stocks in the gritty construction and equipment sectors suddenly looked bright and shiny - shares of Siemens (SI) and Caterpillar (CAT, Fortune 500) rose 37% and 22% in December, compared with the S&P 500's 11% jump.
But while many industrial stocks and funds seem poised to benefit from the coming payout, analysts are skeptical of the actual impact on corporate earnings.
"Everyone has piled into these stocks thinking that the stimulus package will be a home run," says Michael Yoshikami, chief investment strategist at YCMNET Advisors. "But it's going to take time before they look appealing."
The proposed stimulus, as it's currently being debated in the Senate, would allot about $40 billion for transportation, construction and repair; $20 billion for building schools; and $60 billion for updating the electric grid and "greening" homes. The Congressional Budget Office estimates that about a quarter of the funding will be spent in 2009.
But that level of incremental spending, says Yoshikami, won't be enough to offset the slowdown in private expenditures. "The stimulus plan is a plus and the economy is a minus - it's plus two, minus five," he says. "This is just decreasing the drag."
Even if the stimulus passes, equipment makers such as Caterpillar, Deere (DE, Fortune 500), and Joy Global (JOYG) will still get hammered, according to Robert McCarthy, a machinery analyst at Robert W. Baird & Co. "The market still needs to adjust to how severe the effects of the current downturn are - these sectors have bigger problems," he says.
Industrial companies face eroding municipal budgets, decreased credit availability, and economic crises in developing countries that were once a seemingly endless source of infrastructure projects. Many equipment and engineering firms boast hefty backlogs of work, but McCarthy predicts cancellations.
"Witness Manitowoc (MTW), the leader in the crane industry," he says. "The number of cancelled orders they had just exceeded their new revenue orders."
While the stimulus isn't a panacea for infrastructure stocks, it could produce longer term gains for select few companies. Alex Rygiel, an engineering and construction analyst at FBR Capital Markets, thinks highway builder Granite Construction (GVA) and engineering firm URS (URS, Fortune 500) could make the bill pay for them.
"The ones that will benefit from the stimulus have meaningful exposure to federal and state spending," says Rygiel. "They're not heavily exposed to private sector spending, and they're not international conglomerates."
Larger engineering and construction firms such as Jacobs Engineering (JEC, Fortune 500) and Bechtel have smaller exposure to infrastructure - and outsized exposure to the volatile oil and gas industries, says Rygiel. URS, on the other hand, derives the vast majority of its revenue from domestic infrastructure projects.
McCarthy, while bearish on the machinery industry, advises drilling down on names with lower exposure to private spending. He's looking for companies involved in MRO, or "Maintenance, Repair, and Operations." As an example, he recommends Illinois Tool Works (ITW, Fortune 500), which produces manufacturing equipment and consumer plastics. "MRO companies keep other businesses running," he says.
These companies would also capitalize if Congress extends the Safe, Accountable, Flexible, Efficient Transportation Equity Act, which allocates about $41 billion to highway projects each year and is set to expire this fall. "D.C. seems motivated to increase spending on infrastructure - the new bill should be as good, if not better," says Rygiel.
With all the hype around infrastructure, it's no surprise that fund managers are looking to get into the game. "Because of the stimulus package, it's a hot topic," says David Kathman, a fund analyst at Morningstar.
Morgan Stanley's Utilities Fund, for example, changed its name to Morgan Stanley Global Infrastructure Fund in November, adding engineering and equipment companies to its roster.
Several new infrastructure funds and ETFs have sprung up over the last two year. None, says Kathman, are set up to benefit from a domestic stimulus package. "Most funds with 'infrastructure' in their names also have the word 'global,'" he says. "They don't have a focus on the U.S." Global infrastructure is no longer in vogue - but that doesn't mean that developing countries won't resume building power plants and roads once their economies recover.
Jay Rosenberg, manager of the two-year old First American Global Infrastructure Fund, thinks that a boom is still coming, albeit slowly. "When you invest in infrastructure, it takes time," he says.
Compared to long term forecasts for global infrastructure spending - CIBC World Markets projects government spending will hit $30 trillion by 2030 - the stimulus provision seems mighty small. As it should, says Kathman. "Barring total catastrophe, infrastructure is a long-term play," he says. "Not a short-term benefit off of political moves." 
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