A Pipeline To Profits

America's aging infrastructure could be a boon for plenty of companies

For many commuters, the daily traffic snarls, potholes, and bridges under repair serve as a
constant reminder of the deterioration of the nation's infrastructure, much of which hasn't been
updated in decades. Cash-strapped state and local governments have long deferred as much
spending on roads, bridges, and water and sewer systems as possible.

The bill is coming due. According to a November study by consultants Cambridge Systematics
Inc., governments will need to cough up an additional $500 billion for construction and repair of
roads and bridges over the next decade just to maintain the status quo. Modernizing the nation's
aging water and sewer systems, meanwhile, could cost as much as $660 billion over the next 20
years, according to the U.S. Environmental Protection Agency. At $33 billion a year, that would be
a sharp increase from the roughly $10 billion that state and local governments currently spend.

Daunting though the task may be, overhauling the nation's infrastructure should create
opportunity for savvy investors. Alas, finding bargains among engineering, construction, and
service companies isn't as easy as it was a year ago. But infrastructure is a 10-to-20-year growth
story, so there are still plenty of chances for long-term investors. Brett Gallagher, head of U.S.
equities at Julius Baer Investment Management Inc., recommends the Macquarie Infrastructure
Company Trust, a holding company created by one of Australia's largest banks. The trust owns
everything from toll roads to airport parking lots in the U.S. and abroad and provides heating and
air conditioning to such corporate customers as the Aladdin Resort & Casino in Las Vegas.
Gallagher is attracted to the Macquarie trust's hefty 6.5% yield. "That's certainly better than any
bond you're going to find -- and the yield is growing," he says. The Macquarie trust generated
cash flow of 58 cents per share in the quarter ended Sept. 30, providing ample coverage of the
50 cents quarterly dividend. And with 85 cents a share in cash on hand following the acquisition
of another airport parking facility in early October, it's possible that Macquarie will raise the payout
in coming years.

In construction, big is good. Richard Rossi, an analyst for Morgan Joseph & Co., a New York
brokerage, says one of the best infrastructure plays is Michael Baker Corp. (), a Moon Township
(Pa.) engineering outfit that has experience tackling complex construction projects -- everything
from the Trans-Alaska Pipeline System to the New River Gorge Bridge in West Virginia. "They
have the brainpower to do large, complicated jobs, and once you get to large projects, the
number of competitors drops off dramatically," says Rossi. He notes that Baker's backlog has
already grown to $1.4 billion, or roughly double the level at the end of 2003. At just over 22 a
share, Baker trades at a multiple that's just below its 15% growth rate.

WATER WORLD
The truly glistening infrastructure plays might be in water, says Daniel Boone, portfolio manager
for the Calvert Social Investment Fund (). He cites the number of conglomerates that have been
bolstering their exposure to water-related businesses. "When you see savvy companies like
General Electric () buying into this business, you know they're on to something," he says. One of
Boone's favorite water plays is Pentair Inc. (), a Golden Valley (Minn.) industrial company that
now derives 80% of its revenues from water-related systems. These range from water pumps
used to clear floodwater out of New Orleans, to filtration and purification systems used by
everyone from municipal water providers to Starbucks Corp. (), which wants to ensure that its
lattes and frappuccinos taste the same around the country. Boone says Pentair is usually pricey,
but that a pullback in the stock since July from 45 to 37 provides a buying opportunity.

Another company that seems flush: Insituform Technologies Inc. (), a Chesterfield (Mo.) company
that makes equipment for rehabilitating municipal sewers and water mains. John Quealy, an
analyst with Adams Harkness & Hill Inc., a Boston brokerage, says that as municipalities face up
to the expensive task of repairing their aging sewer systems -- an endeavor that will cost the city
of Atlanta as much as $3 billion over the next 12 years -- they'll flock to Insituform's cost-efficient
services. Among them: a proprietary system for relining, rather than replacing, existing pipes
using flexible, jointless tubes made out of resin and other materials. "It's like a catheter or stent
for a sewer pipe. It becomes a pipe-within-a-pipe," says Quealy.

Boone, the Calvert fund manager, also likes FMC Technologies Inc. (), a Houston company that
makes equipment for oil and gas drillers. Boone notes that despite the heavy damage suffered by
the oil and gas rigs off the Gulf of Mexico from this year's hurricanes, there was no environmental
damage. Many of the rigs were fortified with FMC's "subsea trees" -- essentially, pipes that
connect a drilling platform on the surface to the well below. Drillers swear by the pipes because
they have the ability to separate oil and natural gas from water and sand down at the sea floor --
sending only fuel to the surface -- and because the pipes are rugged enough to withstand
pressure of 15,000 pounds per square inch from storms. "We didn't have any spills from Katrina
that contaminated the water," notes Boone. He says oil and gas exploration in the Gulf should
increase in coming years -- and that augurs well for FMC. Analysts expect the company to
increase its earnings by close to 20% annually over the next five years.

EASY METER READING

The electricity crunch in 2003 revealed the degree to which the nation's power grid is overtaxed.
Analysts say some of the most interesting plays are companies that help utilities stretch capacity.
Quealy recommends Itron Inc. (), a Spokane (Wash.) maker of next-generation electrical meters.
Itron helps utilities save money by automating the process of meter reading. Instead of going
house to house, meter readers can drive down the street and take readings from the truck. Itron
also sells devices that, once installed in homes, allow consumers to see a minute-by-minute cost
estimate of how much energy they're consuming -- and other devices that, with the consumer's
consent, allow the utility to trim back power to certain houses and thus reduce output. "This gives
utilities very good flexibility in maximizing their power generation," says Quealy. And given that
70% of all meters must be read manually, Quealy says, there's still a vast replacement cycle
ahead. Analysts expect Itron to boost its earnings by an average of 20% in each of the next five
years. A power crisis during that span could electrify Itron's profits even more. Infrastructure
stocks always look better when things are falling apart.