Grading Three Infrastructure Rebuilding Players
See how construction materials and heavy machinery companies Martin Marietta Materials Inc., Cleveland-Cliffs Inc. and Caterpillar Inc. grade on certain key criteria that you need to consider in order to capitalize on a potential national infrastructure spending bill.
Three Stocks That Could Help Rebuild America’s Aging Infrastructure
There have been high hopes for a significant U.S. infrastructure spending bill for the last few years with very little to show for it. Some politicians are renewing calls for more infrastructure spending. Will this time be different?
President Biden wants to spend $2 trillion on roads, bridges, airports, railways, sources of renewable energy, 5G wireless broadband networks, power grids and electric transport infrastructure, and hopes to win bipartisan support for his plans. The need is indeed enormous. The American Society of Civil Engineers has graded the nation’s infrastructure as a D+ and warned that its deterioration is harming the nation’s ability to compete in the global economy.
The last major infrastructure funding program that was passed into law was the Fixing America’s Surface Transportation Act, or FAST Act. The FAST Act was passed in 2015 during the Obama administration. Originally, the FAST Act program funding totaled $305 billion over five years. The program was set to expire in September 2020 but was extended for another year.
Spending more to rebuild roads and bridges, as well as building out high-tech infrastructure such as 5G networks, could also help provide jobs to those who need them and give a lift to the broader economy.
Still, there are questions about whether Congress will be willing to approve a big infrastructure package. Politicians need to show that infrastructure spending benefits society and taxpayers at large and can improve the economy and make it more productive.
If a large infrastructure spending bill passes, it would likely boost the sales and earnings for a variety of leading U.S. companies in the basic materials, consumer cyclicals, industrials, utilities and technology sectors.
Companies that produce building materials such as cement, concrete and sand and gravel could benefit from any increased spending on transportation infrastructure. Old economy companies like railroads could also benefit as the industry goes more electric and becomes more competitive, with the trucking sector as a greener option for the long-haul transportation of goods.
Martin Marietta Materials Inc. (MLM) is a supplier of aggregates products (crushed stone, sand and gravel) used for the construction of infrastructure, nonresidential and residential projects. The company’s business is categorized into aggregates business, cement business and magnesia specialties business. Its cement business produces Portland and specialty cements. Its magnesia specialties business manufactures and markets magnesia-based chemical products used in industrial, agricultural and environmental applications, and dolomitic lime sold to customers in the steel industry.
Cleveland-Cliffs Inc. (CLF) is a vertically integrated producer of iron ore and steel products. The company has upstream and downstream operations. It supplies both customized iron ore pellets and steel solutions. Its segments include steel and manufacturing and mining and pelletizing. Its steel and manufacturing segment is a producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing and distributors and converters markets. The company’s steel and manufacturing segment includes subsidiaries that provide customer solutions with carbon and stainless-steel tubing products, engineered solutions, tool design and build, hot- and cold-stamped steel components and complex assemblies. Its mining and pelletizing segment is a supplier of iron ore pellets to the North American steel industry from its mines and pellet plants located in Michigan and Minnesota.
Caterpillar Inc. (CAT) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company operates through its main segments, including construction industries, which is engaged in supporting customers using machinery in infrastructure, forestry and building construction; resource industries, which is engaged in supporting customers using machinery in mining, quarry, waste and material handling applications; and energy & transportation, which supports customers in oil and gas, power generation, marine, rail and industrial applications.
AAII’s A+ Stock Grade Summary for Three Infrastructure Rebuilding Stocks
As of March 1, 2021, Martin Marietta had a $21.0 billion market capitalization. Martin Marietta’s stock is up 22.4% in 2021, 3.5% in the previous five trading days and 45.5% in the past year. The company reported its fiscal fourth-quarter earnings in early February. Currently, Martin Marietta’s price-earnings ratio is 30.1. The company’s trailing 12-month revenue is $4.7 billion with a 15.2% net profit margin. Year-over-year quarterly sales growth most recently was up 7.2%. Analysts expect adjusted earnings to increase from $11.25 per share for the fiscal year ending December 2021 to $12.87 per share the following year.
Cleveland-Cliffs’ stock is down 3.9% in 2021, 16.9% in the previous five trading days, but up 152.1% in the past year. The company reported its fiscal fourth-quarter earnings last week. Currently, Cleveland-Cliffs’ price-earnings ratio is not applicable due to negative earnings. The company’s trailing 12-month revenue is $5.35 billion, with a negative 0.4% net profit margin. Year-over-year quarterly sales growth most recently was up 322.4%. Analysts expect adjusted earnings to decrease from $2.79 per share for the fiscal year ending December 2021 to $2.02 per share the following year.
Caterpillar’s stock is up 20.7% in 2021, flat over the previous five trading days and up 76.7% in the past year. Currently, Caterpillar’s price-earnings ratio is 41.3. The company’s trailing 12-month revenue is $41.7 billion with a positive 7.2% net profit margin. Year-over-year quarterly sales growth most recently was down 14.5%. Analysts expect adjusted earnings to increase from $8.10 per share for the fiscal year ending December 2021 to $10.51 per share the following year.
Grading Martin Marietta, Cleveland-Cliffs and Caterpillar Stock
Stock evaluation requires access to huge amounts of data and the knowledge and time to sift through it all, making sense of financial ratios, reading income statements and analyzing recent stock movements. To help individual investors with that daunting task, AAII created A+ Investor, a robust data suite that condenses data research in an actionable and customizable way suitable for investors of all knowledge levels.
AAII’s proprietary stock grades come with A+ Investor. These offer intuitive A–F grades for each of five key investing factors: value, growth, momentum, earnings revisions and quality. Here, we’ll take a closer look at Martin Marietta, Cleveland-Cliffs and Caterpillar stock grades for growth, momentum and earnings estimate revisions.
Martin Marietta, Cleveland-Cliffs and Caterpillar Growth Grades
Growth investing builds on the idea that stocks of companies exhibiting strong, consistent and prolonged growth outperform those of slower-growth companies. AAII measures several dimensions of growth, including year-over-year increases in sales and earnings, long(er)-term historical sales and earnings growth rates and analyst-forecasted long-term earnings growth.
The components consider a company’s success in growing its sales, earnings per share and operating cash on a year-over-year basis for the latest reported fiscal quarter and on an annualized basis over the last five years. High rates, especially compared to the sector median, lead to better scores.
Martin Marietta has a Growth Score of 64, which is strong. Meanwhile, Cleveland-Cliffs has a Growth Score of 41, which is average and Caterpillar has a Growth Score of 33, which is weak.
Martin Marietta, Cleveland-Cliffs and Caterpillar Momentum Grades
Momentum grades help uncover stocks experiencing anomalously high rates of return; research finds that stocks with high relative levels of momentum tend to outperform, whereas those with low levels of momentum tend to continue underperforming. Momentum is based on the price change of a stock over a specified period relative to all other stocks.
Martin Marietta has a Momentum Score of 60, which is average. Meanwhile, Cleveland-Cliffs has a Momentum Score of 71, which is strong.
Caterpillar has a Momentum Score of 62, which is strong. This means it ranks near the top of the pack of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters. The most recent quarterly price change is given a weight of 40% and each of the three previous quarters are given a weighting of 20%.
Martin Marietta, Cleveland-Cliffs and Caterpillar Earnings Estimate Revisions Grades
Earnings estimate revision scores take into account the magnitude of a company’s earnings surprise in its last two reported fiscal quarters. Often, positive surprises beget further positive surprises — or at least continued sales growth (the exact opposite is generally true, too).
Estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Earnings estimate revisions are based on the statistical significance of a firm’s last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Martin Marietta has an Earnings Estimate Revisions Score of 83, which is very positive. Meanwhile, Cleveland-Cliffs has an Earnings Estimate Revisions Score of 42, which is neutral and Caterpillar has a score of 71, which is positive.
Other Martin Marietta, Cleveland-Cliffs and Caterpillar Grades
In addition to growth, momentum and earnings estimate revisions, A+ Investor also provides grades for value and quality. Successful stock investing involves buying low and selling high, so valuation is an important consideration for stock selection. Buying stocks that are going to go up typically means buying stocks that are undervalued in the first place, although momentum investors may argue that point.
AAII’s A+ Investor value grade derives from a stock’s value score. The value score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. The score is variable, meaning it can consider all six ratios or, should any of the six ratios not be valid, the remaining ratios that are valid. To be assigned a value score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.
Stocks with a value score from 0 to 20 are considered deep value, those with a score between 21 and 40 are a good value and so on.
Like the value grade, AAII’s A+ Investor quality grade comes from the percentile rank of key metrics. Specifically, the quality grade is the percentile rank of the average of the percentile ranks of the return on assets (ROA), return on invested capital (ROIC), gross profit relative to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the remaining measures that are valid. To be assigned a quality score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The quality score is used to assess the underlying “quality” of a particular stock. A higher quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period of 1998 through 2019.
Stocks receive better grades (higher scores) for having higher scores for the quality sub-components and worse grades (lower scores) for lower scores for the sub-components.
One of the most popular techniques to search for both value and growth centers around stocks with low price-earnings ratios relative to their earnings growth rates. The price-earnings-to-growth ratio — popularly known as the PEG ratio — is computed by dividing the price-earnings ratio by the earnings per share growth rate.
One of AAII’s stock screens that uses PEG ratios and price strength to find growth stocks trading at a reasonable price is AAII’s Value on the Move PEG With Estimated Growth Screen. This screen has a 14.6% theoretical annual return since inception.
Combining value with price and earnings momentum screens should help to identify reasonably priced stocks that are on the move. However, keep in mind that the purpose of this screen is to illustrate, with real firms, a potentially useful combination of value and momentum analysis.
These two key factors, when combined with the above, provide a holistic view into a particular stock. Further, A+ Investors can see whether Martin Marietta’s, Cleveland-Cliffs’ or Caterpillar’s stock passes any of our 60+ stock screens that have outperformed the market since their creation.
Martin Marietta, Cleveland-Cliffs and Caterpillar Stock: Bottom Line
Overall, Martin Marietta has a Growth Grade of B, a Momentum Grade of C and an Earnings Estimate Revisions Grade of A. Cleveland-Cliffs has a Growth Grade of C, a Momentum Grade of B and an Earnings Estimate Revisions Grade of C. Meanwhile, Caterpillar has a Growth Grade of D, a Momentum Grade of B and an Earnings Estimate Revisions Grade of B.
Whether this makes them good investments depends on your goals and risk tolerance. AAII can help you figure out both and identify which investments align with what works best for you.
We do so through a program of education that teaches you to invest for yourself and become an effective manager of your own wealth — no more relying on others for your financial independence. You can rely on AAII for timeless articles on financial planning and stock-picking, unbiased research and actionable analysis that makes you a better investor.
A+ Investor adds to that qualitative teaching by giving you a powerful data suite that helps you whittle down investment decisions, find stocks, exchange-traded funds (ETFs) or mutual funds that meet your needs and understand your portfolio at a more detailed level.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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