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Global Perspectives on the US Construction Boom

Following a thematic, bottom-up, valuation-sensitive investment process can lead to a differentiated, global view of local market trends with unexpected outcomes.

Benefiting from over $1.2 trillion in government-backed stimulus and a post-COVID economic recovery, many investors may not be aware of the substantial surge in US construction spending, particularly in manufacturing.  The most recent construction spending data from the US Census Bureau put April’s seasonally adjusted spending at a 10% year-over-year increase. This figure includes manufacturing construction, also aided by reshoring activity, which has more than doubled since the end of 2021. These secular tailwinds, and their ongoing influence on stocks, are part of our team’s infrastructure theme―one where we research structurally advantaged companies with hard-to-replicate assets.

Traditional US industrials stocks, such as Caterpillar, Nucor and Toll Brothers, are obvious beneficiaries of a US construction boom. Digging deeper, however, we see more attractive non-US investment opportunities. What do bulldozers in Boise have to do with overseas investing, you ask?

Enter Ireland’s CRH and the UK’s Ashtead. Each has built an extensive US presence by bringing scale, proximity and reliability to America’s builders. We believe these companies are currently undervalued compared to US peers. In fact, because of the valuation mismatch between US and Europe, CRH moved its primary listing to the New York Stock Exchange last year to benefit from higher trading volumes and the potential for being included in US indices. Ashtead may follow suit in the near future.

Deriving almost 70% of its profitability (EBITDA) from the US, CRH is the leading asphalt and concrete provider in America. CRH owns a vast network of over 1,000 aggregate quarries and numerous cement kilns situated close to customers in large US cities. These strategically located assets provide the company with a distribution advantage over competitors with operations farther afield facing much higher transportation costs in getting heavy and bulky materials to the work site. This difference can prove to be critical in a businesses such as cement, where product differentiation is difficult to achieve.

Similarly, Ashtead generates more than 90% of its total operating profit from wholly-owned Sunbelt Rentals, the second-largest equipment rental company in the US. Proximity is also important in this business. Locating heavy-duty construction equipment, such as excavators, cranes and asphalt pavers close to the work site can save time and money. Operating in a fragmented industry with one other large player, Sunbelt Rentals has grown its market share organically by reinvesting excess profits into increasing the density of its rental location clusters located in fast-growing markets within the South and Southwest US. This allows the company to provide customers with greater product availability and faster delivery, thus leading to even higher share gains in a virtuous cycle.

Along with astute capital allocation, both companies have executed their strategies well, resulting in strong compounding earnings growth and shareholder returns.

As our team conducts fundamental, bottom-up research within our investment themes, including infrastructure, we are often drawn to companies like CRH and Ashtead with strong, sustainable competitive advantages. In particular, we look for advantages leading to pricing flexibility, an important factor enabling companies to expand margins and sustain cash flow, even when costs increase. In a capital-intensive business like cement manufacturing, for example, a competitor looking to replicate CRH would not only have to build and finance a new, more proximate plant, but it would also face the daunting task of having to obtain the permits needed to operate it. This could be difficult—if not impossible―in most urban and semi-urban areas within the US these days. We think enduring competitive advantages such as these will be increasingly rewarded by investors, especially as infrastructure investment dollars continue to flow through the US economy creating even higher demand for construction products.

 

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA): A calculation used to compare the profitability of different companies without the effect of financing or capital expenditures.

Artisan Partners Global Equity Team manages portfolios that held securities issued by Ashtead and CRH PLC as of 3/31/24. Portfolio securities are subject to change.