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4/1/2013 5:15 PM ET | By Jim Jubak

9 infrastructure plays to make today

The continuing build-out of the Internet offers investment opportunities, and money is starting to pour into repairs of the nation's highway network.
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0 Despite the calls of the pileated woodpeckers and my daughter's questions about where the mules walked, I couldn't help thinking about investing in infrastructure as I hiked along the C&O Canal towpath near Point of Rocks, Md.
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From Point of Rocks you can see almost 200 years of American infrastructure -- some of it abandoned forever, some almost lost and then revived, some in heavy use but crumbling. If you're looking for a crash course in about how to think about investing in U.S. infrastructure today, Point of Rocks is a great place to start. In this column I'm going to give you a four-part system for thinking about infrastructure investing, as well as seven high-tech and two distinctly low-tech infrastructure ideas to research. Today the long-deserted canal and the tracks of what was once the Baltimore & Ohio Railroad -- now CSX (CSX -1.75%, news) -- share a tiny bit of flatland between a huge finger of rock and the Potomac River. This stretch of land was the prize in an epic court battle in 1828 between the canal company and the railroad, with Daniel Webster and future Supreme Court Chief Justice Roger Taney leading the two sides. The battle almost bankrupted the canal company before the two sides reached a compromise that gave the railroad the right to share the narrow right of way. The canal company's attempt to use the courts to block its competition failed within 30 years. By1850, when the canal reached Cumberland, Md., the midpoint in the company's plan to tie the Ohio Valley to the Atlantic, the railroad had already been in business there for eight years. The canal company abandoned that plan, and by 1889 the canal company and its right of way were owned by the Baltimore and Ohio Railway, which itself used its control of the Point of Rocks right of way to block the Western Maryland Railway. In 1924, the canal went out of operation.

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Laying the groundwork

If you stay overnight in the house at Lock 28 that once sheltered the lockmaster and his family, you know that what was once the B&O Railroad still carries a lot of freight -- much of it in the middle of the night. The B&O, the first railroad in the United States to offer freight and passenger service to the public, broke ground for its network in 1828. By 1889 the railroad was handling 89% of U.S. tidewater traffic in soft coal. And then came competition with other railroads; by 1896 the B&O was shipping just 4% of that soft coal traffic. And then came competition for passenger travel from highways. Revenue passenger miles fell from 878 million in 1925 to 64 million in 1970. By 1964 the Baltimore and Ohio was effectively owned by the Chesapeake and Ohio Railway, and in 1987 the B&O became part of the CSX system. As you walk to the lock house, you pass the bridge that takes U.S. 15 across the Potomac to Virginia. U.S. 15 is one of the original 1926 U.S. highways. Parts of its 792mile length now run parallel to the more modern U.S. Interstate Highway System. But the highway is still a critical link in moving people and goods from South Carolina to New York. (The Potomac U.S. 15 Bridge played a major role in killing the Potomac River ferries. Today White's Ferry, just slightly downstream from Point of Rocks, is the last operating ferry on the river.)
Jim Jubak

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So what's all this got to do with investing in infrastructure? This scene gives you a rough

scheme for separating good infrastructure investments from bad.

Category killers
First, infrastructure categories do die -- even if the death throes are drawn out. It took a long, long time to actually kill off the C&O Canal, even though by the time it reached Cumberland, Md., eight years behind the railroad, the demise of the canal company was assured. Because so much money has been invested in an infrastructure company such as the canal, however, the business has the ability to raise large sums of capital on those assets to cover "temporary" losses. And there often seem to be an endless stream of new owners who believe they can turn the situation around. Second, infrastructure categories can reorganize and reinvent themselves. The railroads are a good example of this -- they shed their money-losing passenger services (the state of Maryland now runs the commuter trains that run on the old B&O tracks) -- and after rounds of mergers reinvented themselves as profitable freight operations. Third, new infrastructure categories do emerge to kill off or seize a major share of business from entrenched infrastructure champions. Highways did this to railroads, for example (with the benefit of public-sector funding). And, fourth, some infrastructure categories look to be so valuable that reinvestment to keep them operating is just about guaranteed. That U.S. 15 bridge across the Potomac fits that category.

With European markets shuttered for Easter Monday, equities saw little change at the start of today's session. However, that changed quickly once the March ISM Index was reported below expectations. The Index was reported at 51.3, which was its lowest reading since December, and it sent the major averages to their lows with cyclical sectors pacing the decline. In addition to the disappointing ... More More Market News Stock Ticker In Play Currencies
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Which current infrastructure investments fit into under these four rubrics? Airlines are probably not Category 1 -- they seem unlikely Rebuilding America's to disappear, short of the invention of Star-Trek style core transporters -- but they don't seem to fit smoothly into 2/13/13 4:56 Category 2 either. I don't see an easy model that produces consistent profits from existing (or even merged) airline companies because it remains far too easy to raise capital to buy planes and start a new airline.

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In my schematic, airlines are struggling to find a transformation equivalent to that of railroads and, until they do, they remain a cyclical bet. Buy the best operators when the losses for the industry are really large and sell when profits are in a recovery mode. TICKERS IN THIS ARTICLE
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Overnight document and freight companies such as FedEx (FDX -0.43%, news) and United Parcel Service (UPS -1.66%, news) look to have a clear route to a railroad-style restructuring. Alternative document-delivery technologies continue to eat away at that part of these companies' business, but that leaves them with the lucrative justin-time freight-delivery market. And that market is growing as more and more of commerce moves to the Internet. Every sale at Amazon.com (AMZN -1.83%, news), for example, is also a potential sale of FedEx and UPS. The attractiveness of that business and its solid prospects are currently buried under the difficulty of restructuring the delivery networks at those companies to cut out some of the costs inherent in a door-to-door one-document at a time delivery system. The big March 21 earnings miss at FedEx, for example, was largely a result of delays in achieving $1.7 billion in cost savings by 2015. The consensus among analysts is that this job is so hard that the company will wind up producing a series of quarterly earnings disappointments as it misses savings targets again and again.

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A good time -- clearly not yet -- to buy the stock is when everybody has thrown up their hands at the halting nature of the company's progress. That is, if you think, that time-sensitive international shipments of goods will continue to grow in volume. More from MoneyShow.com: Jubak on video: More volatility in the eurozone The week ahead: Will spring showers dampen your portfolio? This gold play hasn't stopped shining

Making the connections

The Internet is the disruptive infrastructure category of our time. The fact that many of the initial technologies of the Internet were supported by government spending suggests a comparison to the Interstate Highway System, but I think the more telling pairing is with the growth of the U.S. railway network. The addition of more connections to the network makes the network as a whole more useful and valuable, whether it's the Internet or the rail net. The move from primitive steam-driven locomotives to faster and more powerful steam engines able to pull more freight and deliver it faster is similar to the increased speeds of Internet connections enabling faster on-demand services. And then on the rail side there came diesels, and boxcars with tracking chips and computerized logistics. And on the Internet side cloud-based services, and app stores and virtual networks. I'd say that the Internet infrastructure is still under construction by companies such as Akamai Technologies (AKAM -1.19%, news), Rackspace Hosting (RAX -2.00%, news), VMware (VMW -0.96%, news), Google (GOOG +0.88%, news), Amazon.com, Cisco Systems (CSCO -0.31%, news) and Netflix (NFLX -3.62%, news). But you don't have to go all high-tech to find infrastructure opportunities. The most interesting over the next year might be in gravel, or to get more technical, construction aggregates. Major portions of the Interstate Highway System are now 50 years old. When roads reach this age, you can't just slap another layer of asphalt or concrete on the road surface. You actually have to rebuild the roadbed of crushed stone that supports the road surface. As a highway ages, the surface cracks and buckles. That lets water into the roadbed and produces cracks and holes in the roadbed itself. Paving over those holes at the surface won't any longer do the job, since the holes in the underlying layer of stone cause the surface to break and buckle again. All this is bad news for state highway budgets but good news for the companies that make up the $17 billion (2010 sales) aggregate industry. Production of construction aggregates fell by 37% in 2010. But 2012 looks like it was a turnaround year, with aggregate production climbing 1% on the recovery in the U.S. housing industry and the beginnings of a pickup in highway construction. That recovery looks likely to continue in 2013, with the housing industry continuing its climb and with more federal and state money available for highway repair.

In the aggregate
The most positive development for the aggregates industry is the number of states that have passed new funding mechanisms for highway projects. Among the 22 states that have passed bills to increase highway spending -- and to fund it -- are Virginia ($1.4 billion from 3.5% wholesale tax -- indexed to inflation -- on motor fuels) and Maryland ($4.4 billion from an increase in the gasoline tax). What companies should you take a look at? I've got two suggestions. Vulcan Materials (VMC -2.82%, news) is looking at an 8% to 10% increase in sales in 2013 and then a 10% to 12% increase in 2014, according to Standard & Poor's. With operating margins projected to improve to 8.9% in 2013 and 11.4% in 2014 (from 2.9% in 2012) that should be enough, S&P calculates, to push earnings to 25 cents a share in 2013 from a loss of 48 cents a share in 2012. Earnings will climb to 80 cents a share in 2014. Shares trade at 64 times projected 2014 earnings. That seems expensive, except that the company earned $2.08 a share in 2008 and $4.66 a share in 2007. Or Martin Marietta Materials (MLM -0.11%, news) The company projects volume to climb 4% to 6% in 2013 and aggregate prices to increase by 2% to 4%. Operating margins, Standard & Poor's projects, will climb to 13.2% in 2013 and 15.8% in 2014, from 10.3% in 2012. Earnings will grow to $3.30 in 2013, an increase from $2.29 in 2012, and to $4.25 in 2014. Peak earnings per share hit $6.05 in 2007. In May 2012, a court blocked Martin Marietta's hostile bid for Vulcan on the grounds that Martin Marietta had improperly used confidential information obtained in pursuing a friendly takeover in its hostile offer. The ban on Martin Marietta's pursuit of Vulcan expired in September, but so far there's been no formal announcement of a renewed bid. This uncertainty has made the two stocks volatile, with Vulcan Materials' share price reflecting an assumed takeover premium that may not materialize. Martin Marietta's share price has fluctuated with comments from high-profile bears such as David Einhorn about the prospects for a deal. I'm inclined to wait and see what develops. I like the prospects for the aggregate sector, but I certainly wouldn't mind picking up shares of either of these two companies on a temporary drop on merger news.

Updates to Jubak's picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios. How to play the coming Japanese rally Volatile market produces a dividend winner Oil discovery triggers black gold rush Mining stocks are still dicey Now is the time to seek out bank dividends

Meet Jim Jubak at the MoneyShow Las Vegas MSN Money columnist Jim Jubak will be one of dozens of financial experts on hand at the MoneyShow Las Vegas, May 13-16, at Caesar's Palace in Las Vegas. And admission is free for MSN Money readers. Just click here to register, and click here to see what Jubak plans to talk about. Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website. Click here to find Jubak's most recent articles, blog posts and stock picks. At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund(JUBAX) he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this column. The fund did own shares of Akamai Technologies as of the end of December. Find a full list of the stocks in the fund as of the end of December on the Jubak Global Equity Fund website. More from MoneyShow.com: Jubak on video: More volatility in the eurozone The week ahead: Will spring showers dampen your portfolio? This gold play hasn't stopped shining

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