In this Inside Look, we’re taking a close look at the federal infrastructure bill currently working its way through Congress. We believe the bill’s passage would have a significant positive impact on our region and our economy, not to mention our investors’ portfolios. We’re delighted to share some of our insights here.
The Infrastructure Bill: Economic & Market Impacts
Though the final details are still being debated, one thing is clear: The federal Infrastructure Investment and Jobs Act – better known as the infrastructure bill – has the potential to change the lives of every one of us.
The roughly $1 trillion bill is anticipated to pass both houses sometime this fall. Many details will no doubt change between now and the final bill’s passage. Still, the major elements appear to be certain at this point. In addition to the $550 billion for roads, bridges and public transportation, the infrastructure bill would provide an additional $65 billion for broadband development, $73 billion for power infrastructure, and $21 billion for environmental clean-up.
Mairs & Power vice president and investment manager Justin Miller has been following the bill closely, and he’s dug deep into its possible ramifications for the economy and for the market. “If the bill passes,” he says, “we believe it’s going to be a fairly transformational piece of legislation.”
But that transformation won’t happen overnight. The bill’s language refers to a five-year time horizon for much of the spending. “A lot of these infrastructure projects will be decades-long sorts of investments,” Justin says.
Here at Mairs & Power, we believe that extended time horizon would actually be one of the bill's chief benefits. The bill's long-term impacts would reinforce the foundational strength of a core component of our portfolio: Industrial-sector companies.
Made in Minnesota
Industrial companies have long been a bedrock of the Mairs & Power investment strategy. Our focus has been on companies with durable, long-term competitive advantages. The Industrial companies we hold possess these advantages, largely because they operate in markets with high barriers to entry. “Oftentimes, these Industrial companies are embedded within their customers’ products or within the business itself,” Justin notes. In addition, these companies typically have extremely risk-adverse customers, such as power plants. Once these customers find a supplier they trust, they tend to stick with that supplier for decades.
A good example is Fastenal, a Winona-based distributor of components and hardware. Much of its growth over the past five years has been due to the fact that its products are firmly implanted in its industrial customers’ manufacturing. Another example is Donaldson Co., which is headquartered in Bloomington. Its filtration products are crucial components of the heavy machinery used in construction and other infrastructure projects.
We also like Industrial companies because many of the most solid and successful ones, like Fastenal and Donaldson, are rooted in our own neighborhood. Minnesota and the Upper Midwest have long been a heartland of strong Industrial businesses. These businesses don’t get the media spotlight that technology and healthcare do. But we know that Industrial companies are also creating innovative products, including tools, controls, engineering equipment, analytical instruments, and much more. These are the companies that are building America — and the ones that will be rebuilding it.
Justin notes that several other Minnesota companies likely to benefit from the infrastructure bill. Here are a couple of particularly familiar ones:
Graco. Though it’s best known for paint-spraying equipment, Graco also has a great deal of infrastructure and commercial construction exposure. Almost any construction project uses fluid materials – concrete, for instance, or industrial coatings for wood and steel. Graco makes machines that apply these materials. In addition, it manufacturers equipment that paints stripes on roadways.
Toro. Surprised? Nearly all of us think of Toro as a lawn mower manufacturer. But a few years ago, it acquired The Charles Machine Works, an Oklahoma company whose best-known product is the Ditch Witch. You’ve probably seen Ditch Witches at work in deep-dig utility installation projects. They’re now being used extensively for 5G wireless installations, which positions Toro well for broadband expansion, where the infrastructure bill will contribute significantly.
Numerous other under-the-radar Midwestern companies should also benefit from major infrastructure investment. For instance, there’s Chicago-based Littelfuse, which makes electrical components for applications such as surge protection. Littelfuse also manufactures components for electric vehicle charging stations, which positions it well for the EV buildout that the infrastructure bill would help to drive.
The Bill is Not a Magic Wand
One thing we should make clear: Should the bill pass, and we feel confident it will, its impact won’t be instantaneous. It won’t be a magic wand that will suddenly transform our economy, much less our roads and bridges. Its effects are likely to be slow, uneven, and incremental.
And not all of those effects will be positive at first. For one thing, it could add more fuel to the inflationary fire, thanks to increased demand for commodities such as concrete, steel, and precious metals. Pressures on an already strained labor supply also could be a headwind. Companies of all kinds are struggling to find workers, and that includes those needing skilled tradespeople. As Justin notes, “Adding $1 trillion of incremental business opportunities is going make finding and retaining employees even harder.”In short, the infrastructure bill "is going to slowly play out for decades to come."
It's best to look at the bill's economic and investment impacts from a long-term perspective. And as we've said before, we think that's always the most profitable perspective to take.
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