With the markets anticipating an infrastructure bill, it's a good idea to anticipate which stocks are set to do well. In this particular case, let's focus on three less visible stocks with strong exposure to infrastructural spending. Namely, engineering design software company Autodesk (ADSK +2.35%), metal coating and infrastructure solution provider AZZ Inc (AZZ 2.22%), and maintenance and infrastructure equipment manufacturer Federal Signal (FSS 0.69%). Here's why all three are attractive.
1. Autodesk
The architecture, engineering, and construction (AEC) software company is a great business with a lot of potential for growth in the coming years. The shift to subscription-based sales rather than license sales will make it easier for the company to retain existing customers and convert non-compliant customers. Meanwhile, the increasing use of digitization and cloud-based collaboration within AEC design also plays to Autodesk's strengths as a software solution provider.
There's little doubt that Autodesk is a great company, but is it a great investment? With a current market cap of $62.8 billion, the company trades on nearly 47 times its 2020 free cash flow (FCF), and there are some question marks around its guidance.
The debate centers on the question of whether it can hit its targeted FCF of $2.4 billion in fiscal 2023. Based on management's guidance for fiscal 2022, FCF is going to need to jump from around $1.61 billion in 2022 to $2.4 billion in 2023. In fact, the Wall Street analyst consensus is that Autodesk will fall shy of the target with $2.2 billion in FCF in 2023. Given the high rating on the stock, there appears to be little room for disappointment.
That said, Autodesk is still a high-growth company and an infrastructure spending bill would provide a boost to AEC spending. That might be enough to boost Autodesk's chances of hitting its targets and dispel fears over its guidance.
Ongoing strength in housing construction and a pickup in infrastructural spending will help Autodesk in its home market. Image source: Getty Images.
2. AZZ Inc
Unless you are Fred Flintstone, building roads, bridges, and water infrastructure will require steel and electrical products. That's where AZZ comes in. The company generated around 80% of its operating income from metal coatings such as hot-dip galvanizing of steel and surface coatings in 2020. In plain English, AZZ makes pre-fabricated steel safer and less corrosive, therefore extending and enhancing infrastructure projects. AZZ is the leading hot-dip galvanizer in the U.S.
The remaining 20% of profit came from the infrastructure solutions business that sells electrical products to a diverse range of end markets, including transmission and distribution (T&D) and power. Around 60% of the segment's revenue comes from the U.S. Although T&D sounds as boring a business as you could get, the reality is that the expansion of renewable energy provides growth opportunities as the new wind and solar farms require investment in storage capability and T&D networks.
More infrastructural projects mean more demand for steel in the U.S. Image source: Getty Images.
AZZ's fiscal 2021 ended in February, and Wall Street analysts have AZZ trading on less than 19 times fiscal 2022 earnings. However, those forecasts may need to be revised if an infrastructure bill spurs investment in construction spending.
3. Federal Signal
While Autodesk and AZZ are mainly exposed to new infrastructure spending, the case for Federal Signal is also based on maintenance spending. Around 78% of earnings came from its Environmental Solutions Group (ESG), including street sweepers, sewer cleaning, materials haulage, and road marking equipment.
The rest of its earnings come from the Safety and Security Systems Group (SSG). The SSG is a motley collection of businesses, including police and fire sirens and signals, industrial signaling, and warming systems.
An infrastructure bill looms large in the prospects for both business groups. Indeed, CEO Jennifer Sherman highlighted the matter on the recent earnings call. In terms of maintenance spending, Sherman believes an infrastructure bill could provide additional aid to state and local sources to enable "essential services like sewer cleaning and street sweeping."
Federal Signal provides a wide range of equipment that maintains infrastructure. Image source: Getty Images.
Turning to new capital spending, the need for renewed investment in infrastructure is expected to lead to increased spending in areas like "roads, bridges, broadband, clean energy, and public transportation build-outs." According to Sherman, this could result in increased sales of Federal Signal's "equipment sales and rentals of dump trucks and trailers, safe digging trucks, road marking equipment, sewer cleaners, and street sweepers."
Like Autodesk and AZZ, the right kind of infrastructure bill could result in an upward revision to Federal Signal's earnings prospects. As such, all three stocks represent good ways to play an expected increase in spending.
