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Big investment plays — infrastructure and a Canadian railway

The aging infrastructure around us is a boon for investors, says this U.S. advisory, which also has a Canadian railway among its top picks.

The word infrastructure has been around since the 1920s, when it was coined to describe the roads, bridges, buildings and transportation systems that were needed to make industry run. It also came to stand for the military installations needed for a nation’s defense.

But it’s only recently that infrastructure has become a hot investment term. A whole lot of the infrastructure that has been built since 1920s is starting to wear out.

In addition, a lot of new or improved infrastructure is needed among the emerging economies of the world. These are things that have to get fixed, or built, no matter how the economy is performing.

And it’s your big play as an investor, is the word from Richard C. Young’s Intelligence Report. Mr. Young offers his readers an engineering report card, a prescription for getting things done and two recommendations that cover a substantial amount of infrastructure.

In our customary visit to the advisory’s Top Ten Countdown of stocks we’ll find a well-functioning piece of infrastructure, a Canadian railway.

D for roads, D+ for airports

The infrastructure in the United States is getting old. Federal, state and local governments aren’t keeping it in proper shape. (Things aren’t much different in Canada. The desperate race to cobble together infrastructure in oil sands country is only the most obvious example.)

The American Society of Civil Engineers submits a report card with the following marks: D for roads, D+ for airports, and C for bridges. The governments who are responsible for these structures lack the money to do the job and the will to raise taxes.

“As a result,” says Mr. Young, “the projected funding gap for infrastructure in the United States over the next five years is $1.6 trillion.” And the Highway Trust Fund will go broke by 2009 if nothing is done.

But can you really blame the politicians for the problem, asks Mr. Young (who is not notably easy on politicians)? Not really. Raising property taxes when real estate values are plunging, and excise taxes when gasoline prices are soaring is a political impossibility.

“We are talking about an electorate with an attention span of a few seconds,” he adds. “Infrastructure projects take 20 to 30 years to benefit citizens.” Many who pay the taxes today may never see the results.

This state of affairs will force the U.S. government to recognize what Australia and Europe already know, says Mr. Young. You must bring in private capital.

Focus on developed countries

“Infrastructure assets are extremely attractive from an investment perspective,” explains the editor. “The barriers to entry are high, returns are fairly predictable, and consistent consumer demand results in sustainable and growing cash flows that are usually inflation-adjusted.”

The private-public partnership on infrastructure is a mutually beneficial arrangement, he believes. The government continues to own the facility and collects fat checks to fund other programs, while the private partner runs the facility for maximum efficiency at minimum cost. He uses the example of a toll road, where the private operator becomes something like a utility, with a steady stream of cash flow.

Mr. Young is not enamored of infrastructure in emerging economies. He tells his subscribers frankly “I want you to focus on developed countries where contracts are enforceable and the rule of law is followed.”

That’s why he likes an exchange-traded fund which holds a portfolio of companies from mostly developed markets, iShares S&P Global Infrastructure Index Fund (NYSE-IGF). The companies include Atlantia Spa, an Italian toll road developer, Auckland International Airports and Forth Ports, which runs a number of ports in Tayside and Scotland.

Second on his list of recommendations is the U.S.-based Macquarie Infrastructure Company Trust (NYSE-MIC), a sprawling company related to the even more sprawling Macquarie Group spawned by the Australian bank of the same name. The U.S. trust holds airport services across the U.S., the only gas utility in Hawaii and a huge bulk storage liquid terminal business, among others. “The monopolistic characteristics of the business are appealing to long-term investors,” says the editor. “The competition is low, and the economics of the businesses are attractive.”

When we turn to Mr. Young’s Top Ten Common Stock Countdown, we find infrastructure married to energy in one of his picks. It’s number six on the list, but we’ll put it first. It’s Canadian.

Top Ten: the evolving landscape of railroads

Here is Mr. Young’s explanation for the success of Canadian Pacific (TSX/NYSE-CP): “The evolving landscape in the energy industry is driving growth in the railroad industry. Surging ethanol production and Canadian oil sands production are at the forefront of this trend.” CP is ready to benefit from these long-term trends. It bought DM&E Railroad, which cuts through the ethanol belt and ends in Wyoming’s coal-rich Powder Basin. And it’s building tracks into the oil sands. The editor’s chart shows a powerful resurgence in price after a period of consolidation.

Here are the rest of the top ten stocks for American investors today, in the opinion of Mr. Young. You will note a preponderance of coal.

1) Coca-Cola (NYSE-KO).

2) Federated Investors (NYSE-FII), an investment management firm that makes 60 per cent of its revenues in fixed income.

3) Kinder Morgan Energy Partners (NYSE-KMP). The CEO, with an annual salary of $1, makes his money on the KMP units he owns.

4) Peabody Energy (NYSE-BTU), the world’s largest coal company.

5) J.M. Smucker (NYSE-SJM). The editor has a fascinating treatise on how to mix oil and natural peanut butter back together, just one feature of this long established food company.

6) Canadian Pacific (TSX/NYSE-CP).

7) Alliance Resource Partners (NASDQ-ARLP), yet another major coal producer.

8) American Express (NYSE-AXP)

9) Natural Resource LP (NYSE-NRP), “the conservative investor’s play on coal.”

10) Alico (NASDQ-ALCO), Florida’s tenth largest citrus grower, has operations in two different counties to avoid being wiped out by hurricane damage.

Whether from hurricane damage or simple deterioration, whether the economy is good or bad, whether governments do it or private capital takes over, infrastructure has to be put to rights. With all this repair work to be done, investors should be able to fix some of the damage done by a rundown stock market.