Dryden Pence On How Biden’s Infrastructure Proposal Will Affect The Market

Dryden Pence says Congress is in a position to continue to push another infrastructure spending bill which is very much needed. According to Dryden, 45,000 bridges in the US are considered structurally deficient, and on a per capita basis, failing to rebuild infrastructure cost every American family about $3,300 per year in lost jobs, spending, and productivity. He says two sides of the political aisle has recognized this is absolutely essential and we have to spend the money. Dryden highlights several companies in the construction, materials, and engineering industry groups that a poised to benefit from a congressional bill.

April 19, 2021

Oliver Renick:

Let’s bring in our next guest. Dryden Pence, the Chief Investment Officer at Pence Capital Management. Welcome to the show. Are we actually going to get something real here this year, and can one base investments on that around infrastructure? Is it still just a political gambit?

Dryden Pence: (00:20)

Well, thank you for having me on. I think that where we’re in a position now that we’re going to get an infrastructure bill. It probably won’t look like the one that’s out there, the much-touted 2.1 trillion. If you looked at that bill, even that only had about $800 million that’s purely infrastructure in there.

But, I think that both sides have recognized this is absolutely essential. I mean, we have over 171 million crossings across structurally deficient bridges. Our bridges in this country are in perilous shape, and we have to spend the money. So I think both sides can agree on that, and if they can whittle it down to that, I think we are highly confident that we’re going to have an infrastructure bill. That’s very important. When you think about it, if you just took all of the dangerous bridges and you stretched them end to end, they’re going to go from Las Vegas to Seattle. If you took all the ones that need repairs, that’s just going to go from New York to Los Angeles and back again. It’s a tremendous number, and we’ve got to do something about it. I think people have finally woken up to this issue.

Oliver Renick: (01:33)

So as we see from a chart, there haven’t been many repairs done on a number of bridges. It hasn’t really changed much. Clearly, this is a place where it seems maybe, just kind of intuitively, we need an update, but what is an investor to do by a bridge ETF? How do you do this, Dryden? And do you think that real money will make its way into infrastructure, bridges, roads, or is this going to be a new style of infrastructure that is hyper, like, growth electric vehicle centered?

Dryden Pence: (02:06)

The fundamentals are you still need bridges and roads. That hasn’t changed in a hundred years. As the world spins around every day, they need replacement. So fundamentally, bridges and roads have to occur regardless of whether the car is electric or gas or whatever. When you think about this, there are only a few companies qualified to do this work. This is what we call the big notable theme: we need bridges. And the choke point happens to be that very few publicly traded companies are qualified to do this kind of work. First of all, they have to get bonding. Then they have to get government approval. A lot of these are big joint ventures that they have to get approved. So you have about eight or ten engineering firms that are publicly traded.

Dryden Pence: (02:53)

There are a lot of private companies, but only a few publicly traded companies. Then they have to get all their supplies, of course. There are only about nine or ten of those companies. So we can talk specifically about Jacobs Engineering. If you want to talk about an example in that space, they’re the 22nd largest contract government contractor. They had the most contracts with the EPA. If you think about green energy and things like that – what’s happened when the government issues contracts, they go with who they know. So, there are only nine or ten companies that are doing a lot of this work. The number is $800 billion; it’s a lot of money, and it’s running in this sector, and these companies tend to be small caps, or they tend to be mid-cap companies.

Dryden Pence: (03:36)

They’re going to be more volatile. But, if you think about the fact that a long-term big construction project goes for about seven years, once these things get started, they go for a long time. Then the companies that have them have long-term earnings potential that’s going to last through a cycle. So we think about the engineering companies like Jacobs; not only do you have to engineer, but you got to get it.

So, and they’re going to go to the people that already have it. Somebody like Vulcan, because Vulcan had already had a significant producer of aggregates, right? You have to get the rock and gravel from somewhere, and the EPA is not going to be opening up a lot of gravel pits all across the country. You go to the people who already kind of have the local monopolies, and Vulcan is one of the top two producers in most places.

Dryden Pence: (04:27)

So that’s an example, there are others, and people can look at those, but when you think about it, you want to look at the big engineering companies, and then you want to look at the suppliers. When you think of the smaller companies involved in this, they don’t own millions and millions of dollars worth of equipment. They don’t own their own tractors. They rent them.

So a company like United Rentals spends a lot of time or a lot of their business renting to the smaller contractors. So if you want to kind of think about how do you play all tiers of this market? Give me a big engineering firm, give me a big supplier of aggregate materials and give me somebody that everybody needs to use regardless of their size. That’s the equipment that goes into them. Again, $800 billion is a lot of money. It’s getting thrown at a sector that just a few publicly traded companies really dominate. They’re all going to get their share.

Oliver Renick:: (05:26)

A lot of money coming to them if we get this deal, but also a lot of money that’s gone into them on the stock price too. I mean, I’m looking at URI – up to 200% over the last several years, way, way above where it was pre-COVID. I mean, this thing has just gone straight to the moon. It’s beating the heck out of the industrial group. Jacobs and VMC doing solid, and those are also at multi-year highs. Is the market not moved already ahead of this? Or can you still squeeze some juice out of these trends?

Dryden Pence: (05:58)

In the case of looking at each of these companies, it’s important to think about the long-term quality of those earnings. While the market’s been volatile, again, remember, these are small and mid-cap stocks. So you saw this bid go into that part of the market, and they were carried along with it. But, if we move to the fundamentals of these companies, we’re beginning to see a point where they’re going to start to have a lot of demand for what they do.

So it does look like it has legs. You’re going to see while the pricing may be a little bit ahead of itself, the earnings are going to catch up to it, we think, over time. You had this tremendous amount of money that’s finally hitting this sector, and you still have state and local governments that are funding it a lot as well.

Dryden Pence: (06:47)

So my answer to your question is very clear: we think this movement continues to have legs, and the legs will be fairly long because once you start a big project, it goes for seven or eight years. These are well-paying jobs, and they make big differences. It’s good for the economy overall because there are estimates out there that just infrastructure and roads and inefficiencies and potholes cost the average family about $3,000 a year.

That’s a lot. So if we can improve that, I think we move it across. I think these companies have a long supercycle of infrastructure rebuild. These companies are going to benefit. The other thing that people miss here is that barriers to entry to this business are really high. It’s challenging to kind of get on the bid list because you have capital requirements, you have bonding requirements. A lot of these are done as joint ventures. So it’s really a limited group of folks playing in this pond.

Oliver Renick:: (07:51)

Not that many players competing for it, so stick with the ones with the head start. All right. Dryden Pence, I appreciate it. Thank you!