Rebuild America? Construction stocks dig Obama plan

NEW YORK (Reuters) - Barack Obama delivered an early Christmas gift to investors in the construction, materials and engineering sectors with his pledge to roll out the biggest infrastructure spending binge in half a century to dig the U.S. economy out of recession.

Shares of companies connected in any way to public works projects rocketed on Monday after the president-elect outlined his plan to throw billions of dollars at everything from highway construction to sewer repairs, with a priority shown to those projects seen as "shovel ready."

The Dow Jones U.S. Heavy Construction index shot up by more than 10 percent, about three times the magnitude of the broader market's advance on the day. Shaw Group, a large construction and engineering firms, surged more than 15 percent; Dow component Caterpillar gained 11 percent.

"The great thing is that because of a seizing up in credit, (these) sectors have been pummeled and now represent value, especially in light of these policy moves," said Doug Kass, president of hedge fund Seabreeze Partners Management, who profited from betting against U.S. stocks over the course of the credit crisis.

The question now is whether Obama's promised largess is merely grist for a bear-market bounce or the seed of a genuine recovery in a group hit just as hard as banks by the housing slump and ensuing credit crisis.

STIMULUS ALREADY BAKED IN?

Indeed, investors had already been anticipating the Obama plan, which remains little more than a broad promise at the moment. The construction index has rallied some 67 percent from last month's low, including a 40 percent advance in the last week of November alone.

That has some analysts worried that investors have gotten overly enthusiastic, particularly given how long it can take to get big projects moving and generating profits for these firms.

"The problem is that these projects don't occur quickly, even when state governments have projects on the shelf that they can put to work quickly," said Charles Bradford, a metals analyst at Soleil Securities. Bradford said that the program was "bound to be helpful," though he didn't see any benefit for at least six months after the bill was signed.

In fact, when valued against prospective earnings, the group has grown 50 percent pricier in the space of just 11 trading days and now trades at about 8.8 times estimated 2009 earnings compared with 5.8 times forward earnings on November 20. That may still look a bargain relative to their multiple of nearly 26 in mid-2007 but can seem an unsettlingly rapid valuation inflation in an otherwise deteriorating earnings environment.

"Even if you had all the permits, these are complex projects," he said. "I would say that if you could get something started in six months, you're doing extraordinarily well. The typical lead time is two years."

Currently, the size of the package -- as well as how it will be distributed -- hasn't been detailed, though Obama on Saturday called for the largest infrastructure spending since the Eisenhower administration's interstate highway construction spree in the 1950s. New York Democratic Sen. Charles Schumer said the package should be between $500 billion and $700 billion.

At a meeting with Obama last week, state governors said they needed an estimated $136 billion in repairs to bridges, airports and other infrastructure, while Schumer's estimate included such new construction as hospitals, schools and other projects.

SHAW, JACOBS SEEN PROFITING

Obama does not take over from President George W. Bush until January 20 but has said he wants lawmakers to have a stimulus bill aimed at creating 2.5 million jobs ready for him to sign upon his inauguration.

Obama's campaign website proposes the creation of a national infrastructure reinvestment bank that will receive an infusion of $60 billion in federal money over 10 years.

Investors have tagged Shaw Group as a likely winner in the construction sweepstakes. Sameer Rathod, who covers the company for Macquarie Research Equities, said the company has the ability to construct transport infrastructure. If the scope of the bill were broadened to include energy, "they would benefit from the inclusion of nuclear power," Rathod added.

Since the announcement of the package, Shaw Group shares have surged 65 percent from a low of $11.47 reached on November 20. On Monday they rose more than 16 percent to $19, hitting a one-month high along the way.

Chase Jacobson, senior analyst of the Global Industrial Infrastructure group at Sterne Agee, speculated that Aecom Technology and Jacobs Engineering both stood to benefit from the package, though "the benefit is going to replace money that they would've gotten from other places, like state or local budgets that had to cut back."

Since reaching a low on November 20, however, Jacobs shares have soared 85 percent to $48, including a 13 percent advance on Monday. Aecom shares, gaining nearly 10 percent on Monday, have now more than doubled from their low on October 24.

Are such gains sustainable?

Jacobson, for one, said that while the stimulus "will certainly help," it wouldn't be enough to keep the group rallying at their current pace. "My view on the whole group right now is that long term, infrastructure is something we need around the world. Short term, customers will be prudent with cash. So this may not be an 2009 story."

(Reporting by Ryan Vlastelica, Editing by Kenneth Barry)