Posted on April 17, 2023
Hundreds of new electric charging stations lining highways from California to Virginia are opening to service a growing fleet of electric vehicles.
Major infrastructure projects nationwide are underway, like the improvement of the Brent Spence Bridge over the Ohio River connecting Cincinnati, Ohio, and Covington, Kentucky, that sees over $400 billion in freight movement annually.
Interstate 10 near Diamondhead, Mississippi, is widening from four to six lanes to strengthen access to locations across the Mississippi Gulf Coast to support economic growth and international trade.
And those projects just scratch the surface of what’s to come as a result of the U.S. stimulus programs passed over the past two years.
“We have never had so much U.S. government stimulus, $1.2 trillion, dedicated specifically to expanding demand across broad segments of industrial end-markets,” says William Blair analyst Larry De Maria, group head of equity research’s global industrial infrastructure team.
While a large portion of the spending is set to accelerate the electrification of the economy, supporting the energy transition from fossil fuels to renewables as the world seeks to reduce carbon emissions, hundreds of billions of dollars are earmarked for roads and bridges, airports, high-speed broadband, freight railways, and water infrastructure, De Maria adds.
Larry De Maria, CFA, research analyst and group head of the firm’s equity research global industrial infrastructure team
Since November 2021, the U.S. has enacted three stimulus programs to advance industrial and infrastructure projects:
- $548 billion approved November 2021 from the Infrastructure Investment and Jobs Act (IIJA)—(grid modernization, transit, rural broadband and road and bridges, nuclear plant life extension);
- $280 billion approved August 2022 from the CHIPS and Science Act—(U.S. semiconductor production);
- $369 billion approved August 2022 from the Inflation Reduction Act (IRA)—(accelerate fossil fuel shift to renewables to slow climate change with large HVAC, geothermal, solar, onshore wind incentives).
The Shift to Electric Power
“The IRA alone has unleashed massive new manufacturing U.S. investments in battery and EV production, supporting the shift to electrical vehicles (EVs) from internal combustion engine production,” De Maria says. “This in turn is spawning investments to expand mining production for rare earth and other metals to support the shift to renewable power.”
Ford Motor, for example, announced in February that it was investing $3.5 billion to build a battery plant in Michigan. Volvo, GM, Ford, and others have bought or are considering buying or investing in mining firms to secure the crucial minerals such as cobalt and lithium needed to create the batteries to power EVs.
Generac, known for its backup power systems, is among the companies investing in solutions to meet the challenges utilities will face by the growth of EVs and the added pressure to the electrical grid, says Blake Keating, with William Blair’s industrial tech research team. In March, Generac announced a minority investment in Rolling Energy Resources, a provider of EV load management software. They are working together to provide utilities and electric vehicle owners solutions to monitor, control, and optimize charging.
Even at home, there are multiple incentives in the IRA to encourage consumers to electrification. Federal tax credits for energy-efficient heat pumps or geothermal heat pumps, for instance, are encouraging homeowners to switch from traditional gas and oil-fired furnaces.
Repairing Highways, Bridge, and Ports
The Infrastructure Investment and Jobs Act, on the other hand, has implications across the industrial sector as it supplies the technology and products needed to improve highways, bridges and ports, water safety, and the electrical grid. For roads and bridges alone, the IIJA doubles annual road and bridge construction with an additional $110 billion in funding each year for the next five years (2022-2026).
William Blair analyst Louie DiPalma, who covers industrial companies with a focus on engineering, aerospace, and defense says Jacobs Solutions and Parsons—global providers of engineering and project management—are seen as big beneficiaries of the infrastructure stimulus.
“Parsons is estimating that the U.S. infrastructure bill spend to grow from roughly $20 billion in 2022 to approximately $70 billion in 2026 for the entire industry—aerospace, defense, smart cities—and views smart transportation solutions as one of its fastest-growing end-markets,” DiPalma adds.
Among the companies De Maria covers, he says there is increased enthusiasm and order patterns developing in transportation and infrastructure, including airport infrastructure which bodes well for companies like Deere, Astec, Caterpillar, and JBT.
Evidence that this shift is now in overdrive is the $341 billion of new U.S. production facility investments announced between January 1 and September 30, 2022. As a result, U.S. manufacturing facility construction was up 185% on a trailing 12-month (TTM) basis through the end of December 2022, according to U.S. Chamber of Commerce and Dodge Data & Analytics.
Mega Trends
“While the infrastructure spend is positive for the industrial sector on a high level there are other big trends running parallel to this giving an extra jolt to industrials—reshoring, automation, labor tightness, technology innovation, and digital business models,” says De Maria.
In the near term, most industrial companies have very strong backlogs and positive pricing so even if the economy hits a soft patch, industrials should get through it pretty well considering the megatrends plus the countercyclical legislative spending that’s coming, he adds.
“From a long-term perspective, we increasingly sense we are entering one of the best periods for a highly diverse set of sustained tailwinds for industrial end-markets that could last most of this decade and perhaps well into the 2030s,” De Maria says.
