Infrastructure spending in the US should pick up, no matter the outcome of the November election.
The US housing market is doing well, providing additional support for the construction industry.
Positives seem to be mostly priced in, as Caterpillar’s stock has run up quite a lot over the last couple of months.
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Article Thesis
Caterpillar (CAT) should be one of the winners once infrastructure spending in the US picks up, while the macro environment is also not too bad in international markets. At the current valuation, however, significant growth over the coming years is already priced in, which is why we are moving to a neutral rating on this stock.
Source: Stock Rover
The above table that shows Caterpillar and its peers from the construction machinery industry tells us Caterpillar is not really inexpensive compared to its peer group, neither by profits nor by cash flows. Its stock offers an above-average dividend yield, however.
Infrastructure Spending In the US Should Pick Up Over The Coming Years
This year’s election sees two parties with vastly differing positions on many subjects, but both parties do more or less agree that infrastructure spending has to grow meaningfully going forward. This summer, Bloomberg reported that the team of President Trump has prepared a $1 trillion infrastructure spending plan, while Presidential candidate Biden’s team has proposed an even larger infrastructure investment program that is worth $1.3 trillion. Even Congress seems to see a need for increased investments in the country’s infrastructure, as the House has passed a bill that seeks a $1.5 trillion investment. The focus of these programs is not identical, of course, as more weight is put on some assets over others depending on what party or politician is introducing each program, but there seems to be a wide consensus that infrastructure spending has to pick up. That makes sense, as the American Society of Civil Engineers has estimated that more than $2 trillion in investments into the country’s roads, bridges, ports, etc. was required through 2025. Research by McKinsey and others shows that these investments will not only help keep existing infrastructure in place, they will also spur economic growth and job creation, thus increased investments in this area seem to be in everyone’s best interest — at least if done right.
