Trump, Pelosi & Schumer Say, ‘Let’s Make A Deal!’

Late night tweets and Congressional investigations notwithstanding, there was a lot of positive energy coming out of the White House after President Trump met with Democratic leaders Nancy Pelosi and Chuck Schumer to try and get the long-stalled effort to rebuild the nation’s infrastructure moving.

Anyone who spends time traveling around the US can attest to the fact that many of our cities and towns have the equivalent of third-world infrastructure with numerous roads, bridges and tunnels long overdue for repair or replacement. The American Society of Civil Engineers has given the US infrastructure a D+ grade and estimates that it’ll cost about $2 trillion to fix it.

That figure was also the one coming out of the initial White House meeting, but discussion of where that money will come from was put off for the time being. Clearly, rebuilding our decrepit infrastructure is going to take a considerable amount of money and won’t happen overnight. But congested highways, collapsing bridges, and pothole-strewn roads are clearly unacceptable and operate as a hidden tax on our entire economy.

Fortunately, the need for new spending on infrastructure is an issue that cuts across party lines. It’s now going to be up to members of both parties in Congress to find a creative funding solution, that won’t cause damage to other parts of the economy.

The benefits from instituting a massive program of infrastructure spending are pretty obvious. Workers and companies will be hired to do the building and repairs; construction materials will need to be purchased, trucks and drivers will be needed to move those materials. All of that activity will stimulate more consumer spending as well as more people are employed, at higher wages, in turn producing additional tax revenue for the government to help pay for it. Not to mention the additional benefits to the entire economy from a more efficient transportation network.

A recent report from the Business Roundtable found that a more modest “fiscally responsible investment of $737 billion over 10 years in surface transportation, water and wastewater, aviation, water resources, and water transportation, plus the crucial step of establishing a ‘new normal’ level of public-sector commitment to maintaining American infrastructure” would deliver tangible results for American families to the tune of an average of $1,400 in disposable income every year for two decades. The report went on to note that over that 20-year window, every additional dollar spent on infrastructure will drive about $3.70 in additional economic growth. Spurring infrastructure spending will certainly benefit many American companies, in a number of industries.

Re-building America’s bridges and tunnels is going to require a lot of steel, and with existing tariffs American producers are likely to get a much bigger share of that business than they might have a year or two ago. And not only steelworkers will come out ahead. It’s also welcome news for metallurgic coal producers, such as Contura Energy (ticker: CTRA) and Warrior Met Coal (ticker: HCC), who primarily mine met coal for use in making coke – a necessity for steel and iron making In recent years, both those companies had been in distress but went through major reorganizations that put them on much firmer footing. Increased demand for their coal from steel producers will help them even more.

Prior to reorganizing, Contura had $7.8 billion of debt but today it has only a fraction of that remaining. In the last quarter of 2018, it completed a merger with its old sister company (Alpha Natural Resources) to make it the largest domestic metallurgical coal producer. It’s management also refinanced the company’s term loan, and got its stock listed on the NYSE under ticker CTRA.

In the same sector, Warrior Met Coal is a large scale, low-cost U.S. based producer and exporter of premium metallurgical coal. This company was formed by lenders to its predecessor, Walter Energy, which was publicly traded but had filed for bankruptcy in 2015 with about $4 billion in liabilities. In its bankruptcy, Walter Energy’s lenders cherry-picked the best and most profitable metallurgical coal assets out of the estate to capitalize Warrior Met Coal with an entirely fresh start. Like Contura, Warrior now has a tiny fraction of the debt it had before reorganizing and this change has given both companies the financial wherewithal to allocate substantial capital returns, in the form of dividends and stock buybacks, to shareholders. Warrior’s management has also done a good job since then and 2018 was HCC’s best-ever sales and production volume year as the company exceeded guidance targets.

If this infrastructure talk turns into real action, it will add to the positive economic signs we’ve seen of late. Expansionary fiscal policies (tax cuts, opportunity zones, et al.) coupled with ongoing executive branch deregulation of industries, including banking, coal, oil & gas, and manufacturing, continue to boost domestic growth. Meantime, monetary policy remains accommodative as well.

Overall, the climate in the US is more business-friendly than we’ve seen in decades. A real commitment to infrastructure spending and maintenance will only serve as another catalyst for growth and certain companies and industries that were formerly distressed may see a disproportionate benefit.