Several eager readers have forwarded along this teaser, which started running in the last week or so and which pitches a way to profit from the big infrastructure investments that will be made around the world in the coming years.
The ad is for Jeff Siegel’s Power Portfolio over at Angel Publishing, a newsletter which appears to have taken the place of Green Chip Stocks (which, given its focus on alternative energy, probably had at least a couple bad years recently).
And the premise is a fairly straightforward one:
“From Asia to the Middle East… North Africa to the Caribbean… Nearly $50 Trillion Worth of Infrastructure Projects is Under Way
“And starting today, you could make millions from three global giants that play a pivotal role in rebuilding our world.”
They refer to this $50 trillion as “one project” and compare it to other massive infrastructure investments in history when they call it by far the biggest project ever — thousands of times larger than the Aswan Dam, Golden Gate Bridge, etc. Which is, of course, comparing apples to cranberries … but Siegel also says that this $50 trillion project is the result of some secret backroom dealing:
“According to a study by Stanford University, the current global Infrastructure boom ‘… amounts to the biggest global build-out of physical economic assets in the history of man.’
“And believe it or not, this massive construction project — soon to be the largest the world has ever undertaken — was initially agreed upon secretly behind closed doors in a tiny undisclosed location in Seoul.
“In fact, it actually started out as nothing more than another backroom deal between a dozen or so G-20 leaders, a small group of the world’s most powerful men and women who represent 19 countries, plus the European Union…
“A group representing countries that control 90% of the world’s Gross Domestic Product, 80% of world trade, and 66% of the world’s population….”
And he even goes sof ar as to use the subject line, “Korea Just Launched a Secret Weapon” in teasing this spending project.
There are specifics, though, and they’re far smaller — he says that they’ve “Formally set aside” the first $1 trillion or so, with the first projects being Indian railroads, pipelines, bridges and hydroelectric plants … and, as you might expect, he says that he knows the companies who will win these contracts and benefit from this massive spend.
And the notion that big transnational entities are in favor of — and even pushing for and possibly helping to fund — big infrastructure investments in the developing world is true, though the “we’re supporting India’s investment” part is what came out of the G-20 summit last week, with India saying they need at least $1 trillion and the world leaders saying they’ll, well, get on it and ask the global investment banks (IMF and World Bank) to push for this kind of ramped up spending. The $50 trillion amount is the more theoretical “this is what the world needs” number from the Organization for Economic Cooperation and Development (OECD), which is basically a think tank run by the world’s largest and most developed economies. The OECD, by the way, implied that one way to boost this spending is for pension funds to invest more in infrastructure — which would mean that at least some of this could end up being privatized infrastructure, the kind of thing that we’ve written about a few times when discussing private infrastructure funds like Brookfield Infrastructure Partners (BIP) or Ferrovial (FRRVY)
But that’s not the point of this particular ad — Siegel is touting the companies who will actually get contracts to build these massive projects around the world, particularly those who are getting involved in India’s big investment program but also those who will benefit from the broader push on this kind of global spending.
And of course, he implies that he alone has access to these top secret reports from the G-20 — this particular focus started up last year at the G-20 meeting in Seoul, South Korea, and the report of that High Level Panel on Infrastructure Investment is technically marked “Confidential” … but it’s also freely available online from the G-20 right here, so you can check it out if you enjoy reading that sort of thing. So yes, we all have top-secret access to this “leaked” report … but shhh! Don’t tell anyone!
So who are the three companies he thinks will benefit? To the clues, please!
“Infrastructure Wealth-Builder #1: This $199 Billion Modern Energy Powerhouse Could Make You Retirement-Rich
“My first play is a true global infrastructure behemoth…
“An innovative, advanced technology infrastructure and financial services company with the scale, resources and expertise to solve tough global problems for customers and society.
“Working in more than 150 countries around the globe, this booming infrastructure provider has been bringing cutting-edge innovation to the world for over 120 years — amassing over 19,000 patents and two Nobel Prizes.
“With infrastructure projects worth billions in Brazil, Egypt, China, Australia, Saudi Arabia, Kenya, Turkey, and over 92 other countries…
“This global powerhouse has won over $18 billion worth of global contracts in the last six months alone.”
This one is not just a infrastructure provider, but it is most certainly a company you know — here he’s teasing General Electric (GE), which is indeed working in almost every country on earth — and which does a lot of infrastructure work, particularly as it related to power generation and gas turbines. It’s also recovered quite nicely from the recession, it’s not quite as dominated by its financial services arm any more, but it does still carry a truly massive debt load ($360 billion in net debt, market cap now about $205 billion). They’ve resumed their dividend growth push now, after slashing the dividend in 2009, and the stock now yields over 3%, which should be pretty safe these days with plenty of free cash flow and a payout ratio of just about 50% (payout ratio is the portion of earnings that goes to the dividend).
GE is definitely a company you know, but you may not know exactly how they make money or the vast array of businesses that are under their conglomerate umbrella — probably the quickest way to get a handle on the company, should you wish to do so, is by quickly perusing the annual meeting presentation materials. They’re definitely trying to swing more of their focus to big infrastructure projects and to simplify the company, but they do still have the baggage of the big GE Capital real estate exposure and the heavy level of debt, so if you’re concerned about a repeat of 2008-2009 that might concern you (I tend to think that the next crisis will be entirely different and surprising, so I wouldn’t focus my fear on 2008 victims like GE … but that doesn’t mean they’re without risk). GE is not particularly cheap, particularly if you wrap their debt into the valuation equation, but on the surface their forward PE of about 11 is reasonably competitive with other megacap industrial companies.
How about number two?
“Infrastructure Wealth-Builder #2: Re-Building the World… and Your Pocketbook
“My second play is a booming infrastructure provider that has become a global electrical engineering giant.
“In fact, it’s the leading energy service provider for nearly 20% of all large-scale and industrial power plants worldwide.
“Its modernization and upgrade solutions increase efficiency and capacity of existing power plants, enabling them to generate more electricity with the same amount of fuel.
“While it’s mostly recognized as an electrical engineering company, its business includes two explosive segments that could make you a boatload of cash — and will allow it to continue its run as a global giant.
“Those two segments are energy and infrastructure.
“For over 150 years, this global giant has stood for outstanding technical capacity, innovation, quality, reliability, and internationality.
“It’s become a major player in the wind energy industry and has positioned itself as the leader in the offshore wind segment.
“From the world’s first offshore wind farm more than 20 years ago, this energy giant has been at the forefront of this breakthrough technology.
“One of its newest wind projects in Germany will create enough power for nearly 400,000 households by 2013.”
This one will probably sound familiar, too — “wealth-builder #2” is, so sez the Thinkolator, Siemens (SI).
And unlike GE, SI is looking somewhat cheap these days — that’s partly due to some weakness in their order backlog, and certainly due at least in part to the panic about Europe, since broke governments in the euro countries are thought, by at least some investors, to be unlikely to spend big on Siemens trains or power plants or sponsor additional wind farms that use Siemens turbines, etc. etc. SI trades at a forward PE of about 8, and it doesn’t have that finance company hiding in the middle of their corporate structure so they carry dramatically less debt than GE (which is a big Siemens competitor in some areas) — SI is about a third the size of GE and trades at a lower multiple of sales, but is also less profitable than GE. I think I’d probably prefer Siemens to GE at this point, since it’s been beaten down, has a higher dividend, and doesn’t have as much of a history of financial engineering and opaque reporting that just-so-happens to come in exactly in line with analyst estimates every quarter (with this kind of massive debt and huge GE Capital division that gives more flexibility in recording gains and losses, many folks have noted that GE can pretty much make their earnings turn out exactly as they want them to — I don’t know if that’s still true in the post-Jack-Welch days, but it remains a part of their image).
On the flip side, of course, Siemens’ failure to manage their earnings to investor expectations has helped to clobber their stock — they badly failed to meet their earnings expectations in each of the past two quarters (including the last quarter, which was a 64% drop in earnings from a year ago), which, when you toss in the big exposure to Europe, helps explain why they’re trading at a discount to their larger competitor. Still, if you’re going to buil a gas, hydro or wind power plant of any kind anywhere in the world, changes are very good that you’ll look first at either a GE or Siemens turbine to generate that power.
How about one more? I thought you’d never ask! Here’s the finale:
“Infrastructure Wealth-Builder #3: Get Rich with This Emerging Markets Power-Builder
“Look for this third play to continue landing major contracts in the next few years as massive improvements in infrastructure are sorely needed worldwide…
“Between crumbling power distribution systems, new transmission to facilitate wind and natural gas power production, and technological improvements that are leading to a more efficient grid, there’s a lot of capital flowing into new and existing electricity infrastructure projects.
“As a result, you can expect to see a lot of major deals for a handful of grid-related companies — like this major transmission and grid giant.
“This infrastructure powerhouse has been in business for 120 years and now leads the world markets in both power-transmission and power-management systems, as well as in industrial-automation products and systems.
“It operates in more than 99 countries and has offices in over 85 of those nations, giving global and local customers the support they need to develop and conduct their infrastructure build-out successfully.”
Well, after the first two turned out to be GE and Siemens … I guess it won’t surprise anyone that powerhouse number three is really a powerhouse, and probably the only other company that might easily trip off the tongue if you’re talking about electrical power and generation plants and grid modernization. This is, sez the Thinkolator, ABB (ABB).
Formerly known as ASEA Brown Boveri, and the result of a big merger of Swedish and Swiss firms in the late 1980s, ABB rode high on the emergence of the BRIC countries and the big global story of “everyone needs better grids and more electricity”, which helped the stock triple between 2006 and 2008 and get into the portfolios of a lot of the newsletters we cover here. The stock collapsed worse than most in the financial crisis before building back up nice and slowly in that recovery, but the last year has also been bad for ABB shareholders — the stock was at about $25 a year ago and now is right around $15.
At $15, with a trailing PE of less than 11 and a forward PE of about 10 to go with a solid dividend of nearly 5%, ABB is arguably the most beaten down and undervalued of the three — though it’s also the least diversified and the smallest (though small is relative here — at $35 billion it’s about half the size of Siemens but still obviously quite a huge company). Like Siemens, ABB has put together a few disappointing quarters in a row, failing to live up to analyst estimates, but despite the disappointing growth they’re still certainly profitable, growing slowly, and effectively debt-free.
So there you have it — three very large companies, probably the three largest companies in the world (certainly the biggest well-known publicly-traded ones) that are focused, to at least a substantial extent, on building out electrical infrastructure — power plants and turbines and grids and the like. They all do a lot of other things, too, but power is where their heart is. They’re also all priced fairly similarly in terms of forward PE ratios, in the range of 8-10X next year’s expected earnings, and analysts think all three will grow their earnings by about 10-12% per year, so if you think the developing world will indeed see a huge infrastructure spending boom in the next few years, particularly in expanding electrical grids and building more power generation capacity, then any of the three seems reasonable. Based on my cursory look at all three I would still personally go with SI over ABB and GE given the strong dividend, beaten-down price and good balance sheet … but the same general drivers (global GDP growth, infrastructure build-out and developed world infrastructure upgrading) should be the main long-term reason to invest in any of the three.
But I don’t actually own any of these and am not likely to invest in them in the coming weeks — so since it’s your money, what do you think? Have a fave infrastructure company among these three, or one that’s not on this list? Let us know with a comment below.