The Other “Tea Party”: Highway Funds Headed for Smaller Contractors

Investors wisely follow current politics. But you probably are paying attention to the wrong Tea Party. The one that matters for the U.S. economy and for stock-picking investors is the party that will be held nationwide if Congress passes the latest version of TEA – the Transportation Equity Act -- better known as The Highway Bill.

The last multiyear highway bill, signed by President George W. Bush in 2005, was extended on a short-term basis. The current extension is scheduled to expire in September. But things are looking up. Earlier this month, John Mica (R-Fla.), chair of the House Transportation Committee, outlines a $210-billion spending bill for roads and bridges over the next six years. The Senate is mulling a $339-billion bill. And earlier this year, President Obama proposed $556-billion.

However many billions of dollars, a multiyear highway bill has solid bipartisan support on Capitol Hill, despite the raging debate about spending cuts and shrinking government. It also has broad implications for a diverse array of companies that would get the money – and the workers who would be hired.

Among the beneficiaries are multinational construction giants, such as Caterpillar (CAT), which have done well this year, and smaller construction-linked companies, which have not. YCharts data tells the story, comparing return on investor capital and share price changes at Caterpillar and Granite Construction (GVA), a California-based domestic supplier of road-building materials and expertise.

Granite Construction Return on Invested Capital Stock Chart by YCharts

Caterpillar Price Stock Chart by YCharts

This comparison described a major problem in the U.S. industrial sector, a problem that a multiyear highway bill would address. As Granite CEO James Roberts told shareholders in May, “The ongoing delays associated with the federal highway bill and the budgetary pressures at the state and local levels are providing some uncertainty as we look further out.” Ninety-four percent of Granite’s $942 million construction revenues in 2010 came from government contracts.

Granite's fundamentals scores a Top 10 rating in YCharts' analysis, reflecting its consistent record of quarterly dividend payments, book value per share growth and a stable debt-equity ratio. In recent quarters the company has trimmed expenses in line with declining revenues. New business generated by a highway bill would thus more easily fall to the bottom line.

You may have heard or seen advertisements depicting Presidents Ronald Reagan and Bill Clinton singing the praises of highway spending. The ads are sponsored by the American Road and Transportation Builders Association (ARTBA), one of more than a dozen groups lobbying for the bill.

The public companies active in ARTBA and the other groups comprise a portfolio for investors who believe that infrastructure works as a long-term macro investment theme. Some of the big names are obvious. Caterpillar, market cap of $69 billion, is the largest company inYCharts’ new stock screener under Industrial Goods. 3M (MMM), General Motors (GM), Cemex (CX), Owens-Corning (OC) and Raytheon (RTN) – all market cap leaders in the Industrial Goods screen – are backing the highway bill, too. No surprise.

But the best pickings may be in the smaller companies whose fortunes are linked more directly to a multiyear U.S. highway bill than even those of Caterpillar. In addition to Granite Construction, companies pushing for the bill include Sterling Construction (STRL), a Houston-based infrastructure builder with 2010 revenues of $460 million; AECOM (ACM), a New York-based infrastructure design and project management company with 2010 revenues of $655 billion, and Iteris (ITI), a California-based traffic engineering company with 2010 revenues of $59.4 million.

Caterpillar has been enjoying booming overseas sales to the mining industry, but these smaller companies are heavily reliant on domestic work, and another TEA highway spending bill could help close the price gap between Caterpillar and the smaller players.

Sterling Construction Company Price Stock Chart by YCharts

Bill Barnhart is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.