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Morningstar | President’s State of the Union Infrastructure Comments Lack Detail, But We’re Optimistic on Funding

On Feb. 5, President Donald Trump delivered his second State of the Union address. His comments called for increased bipartisanship but lacked specifics regarding his legislative agenda. Additionally, the speech focused heavily on divisive issues such as immigration.

Trump's comments on infrastructure received applause from both parties. The president said, “Both parties should be able to unite for a great rebuilding of America’s crumbling infrastructure. I know that the Congress is eager to pass an infrastructure bill--and I am eager to work with you on legislation to deliver new and important infrastructure investment, including investments in the cutting-edge industries of the future. This is not an option. This is a necessity.”

Many pundits believe infrastructure has considerable potential for bipartisan success, though the source of funding remains up for argument. The president’s last State of the Union speech also called for infrastructure spending, but provided more detail than this iteration. Lack of detail in this year’s speech drove worry in U.S. aggregates and concrete stocks, which declined roughly 3%-4% in response.

U.S. aggregates and concrete stocks we cover have dropped 20%-60% since the beginning of 2018 amid fears of slowing construction activity. We think shares underestimate improved infrastructure spending and we see risk-adjusted upside in all four U.S.-focused stocks: best-idea and narrow-moat Martin Marietta, narrow-moat Vulcan Materials, narrow-moat Summit Materials, and no-moat U.S. Concrete.

As highlighted in our report “U.S. Infrastructure Spending Outlook Boosted by Midterm Elections,” we think the market remains overly pessimistic. In the near term, the FAST Act will continue to fund nearly $50 billion in annual federal infrastructure spending through the end of 2021. Meanwhile, the long-term funding outlook has been boosted by favorable midterm election results for Congress, state governors, and referendums.

Lastly, we think the election timeline increases the probability that a plan will pass in the next two years. With midterm elections completed, legislators can focus less on campaigns. Additionally, with 2020 elections now looming, a successful infrastructure plan would help candidates seeking re-election to deliver on campaign promises.