Pundits and interest groups across different political spectrums are pretty much in agreement that the current state of infrastructure investment is unsustainable in the United States. With spending on roads, highways, and bridges at a ten-year low, increased investment will be necessary to meet the demands of a 21st Century economy.

Currently, some 42% of major urban highways remain congested, costing the economy $100 billion annually in wasted time and fuel. The Federal Highway Administration has estimated that $170 billion annually will be needed to make significant improvements. Government agencies and various groups have estimated that between $2.5 trillion and $4 trillion will be needed to rebuild and maintain the country’s infrastructure by 2020.

Numbers aside, there is little doubt that there will be a number of opportunities for engineering and construction companies in the coming years. We expect a noticeable pickup in investment, as the economy continues to rebound from the financial crisis. Though last year represented a ten-year low in spending, we believe stronger state budgets and political consensus on the issue should provide some optimism for the industry. We expect that between 10 and 12 projects over $1 billion will be awarded over the next 12 months. Highways, bridges, and public transit are just some of the jobs in the pipeline.

What’s being done to address the problem?

Despite some promising signs, the political paralysis in Washington still provides some uncertainty with regards to the size of future funding. On the bright side, Democrats and Republicans pretty much agree that infrastructure investment is vital to the U.S. economy. For example, the Highway Trust Fund was exempted from recent automatic spending cuts. Additionally, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) extended transportation funding through fiscal 2014. The $105 billion will be used towards various aforementioned infrastructure ventures. We believe that the overwhelming support in both houses for this legislation last summer only reinforces lawmakers’ recognition of the lackluster investment in infrastructure.

Over the next two years, nearly 75% of the funding in the law will be appropriated to construct and repair highways and bridges. California, Florida, and Texas are the largest recipients of the cash outlays. California will be receiving the majority of cash to fix up its infrastructure, where 68% of its roads are rated either mediocre or poor in terms of condition. Granite Construction (GVA) and Aecom Technology (ACM) have had a nice presence in the state for a number of years and should benefit from the pickup in jobs. In fact, Granite’s largest customer, the California Department of Transportation, accounted for roughly 13% of its sales last year.

With states being cash strapped, Congress has looked for ways to bolster investment. The Transportation Infrastructure and Innovation Act (TIFIA) program is one such endeavor that is boosting opportunities. The $1.7 billion program provides federal assistance via loans, lines of credit, and loan guarantees to finance national and regional infrastructure projects. The initiative offers an opportunity for large complex projects to receive access to capital markets and more favorable interest rates. Highway, transit, railroad, and intermodal ventures are eligible under the plan. This program encourages public-private partnerships and will be vital given the current environment. 

TIFIA already appears to be gaining some momentum with over 30 letters of interest totaling $41 billion so far in fiscal 2013. The New York Transit Authority is currently under review for a direct loan of $1.5 billion for the Tappan Zee Bridge. Fluor (FLR) and Granite Construction’s consortium recently were awarded the contract to rebuild the outdated bridge. The $3.1 billion job should provide both companies with some nice work until its completion in 2018. The project will likely be paid with a mix of a federal loan and higher toll rates.

What’s on the Horizon?

We believe a majority of new projects will come from states like Texas, Florida, California, and New York. In fact, many E&C’s are anticipating a strong pickup in work towards the back half of this year. There are as many as a dozen large projects over the $1 billion range that are set for bidding in the coming quarters. A couple of bridge projects in New York, the California high speed rail, and a number of highway projects in Texas and Florida are just a few of the potential opportunities.

While a longer-term infrastructure fix appears unlikely in the near term, we believe the states will start shouldering a big share of project financing through taxation, tolls, and user fees. Urban Transit, road and bridge maintenance, and water infrastructure will most likely be targeted. Depending on the city or state, many governments have begun to loosen the purse strings for smaller projects in the $50 million-$100 million range. In Atlanta, URS (URS) was awarded a $46.6 million street-car design-build contract at the end of last year. Granite Construction also was recently awarded a $61 million dam removal contract and $130 million highway reconstruction contract in North Carolina. 

The current political climate remains problematic for any longer-term infrastructure legislation. That said, many projects that have been postponed over the last couple years are starting to be awarded. We believe public spending is set to rebound given an improvement in the job and housing markets. The significant amount of work in the pipeline, coupled with an existing $200 billion backlog in highway and bridge projects, should provide engineering and construction companies with some nice opportunities in the coming years.

For a more detailed evaluation of the companies mentioned here, and the particular investment merits of the stocks, subscribers are encouraged to view our full-page reports in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.