After months of negotiations, the U.S. government recently passed a $1.2 trillion fiscal package.

This immense fiscal package includes $550 billion of new investment in the nation’s infrastructure, which includes airports, ports, highways, bridges, and railroads. The infrastructure bill will provide a strong tailwind to some infrastructure stocks.

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In this article, we will analyze the prospects of three infrastructure stocks that are ideally positioned to benefit from the new infrastructure plan.

Caterpillar (CAT)

Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It operates in three segments: Construction Industries, Resource Industries and Energy & Transportation.

Caterpillar was severely hit by the coronavirus crisis last year, as its customers cut their investment projects drastically due to the fierce recession caused by the pandemic. However, thanks to the massive distribution of vaccines, the customers of Caterpillar are enjoying a strong recovery this year, along with the global economy. As a result, Caterpillar is on track to return close to its pre-pandemic earnings this year.

Its strong momentum was evident in its latest earnings report. In the third quarter, the company grew its revenue 25% over last year’s quarter, with more than 20% growth in all its segments. As a result, it grew its earnings per share 75%, from $1.52 to $2.66, and exceeded the analysts’ consensus by an impressive $0.45. It was the sixth consecutive quarter in which Caterpillar exceeded the analysts’ estimates by a wide margin.

Moreover, the above-mentioned infrastructure bill will provide a strong tailwind to Caterpillar in the upcoming years, as the company is ideally positioned to benefit from the resultant boom in construction. Thanks to the infrastructure bill and the sustained growth of the U.S. economy, Caterpillar is likely to post record earnings in the upcoming years.

Nucor (NUE)

Nucor is the largest steel producer in the U.S. The company has faced intense competition from international competitors for years, as some countries, such as China, have been subsidizing their steel producers, thus rendering steel exported to the U.S. artificially cheap. President Trump implemented a 25% tariff on imported steel for all the countries apart from Canada and Mexico in 2018 and thus rendered Nucor more competitive.

Nucor is currently thriving thanks to the ongoing recovery of global economic activity from the pandemic. The impressive pent-up demand from the construction industry combined with low steel inventories has led the price of steel to rally to new all-time highs this year. Due to a recent deceleration in construction activity in China, the price of steel has incurred a 30% correction off its peak in early October but it remains far above its historical average.

Due to the nature of the business of Nucor, the price of steel is by far the greatest determinant of the earnings of the company. As a result, the rally of the steel price has led Nucor to post record earnings this year. In the third quarter, Nucor increased its steel shipments 13% over the prior year’s quarter and grew its earnings per share more than 10-fold, from $0.63 to an all-time high of $7.28. Nucor is on track to grow its annual earnings per share more than 5-fold this year, from $4.40 to $22.95. This is an impressive record, as the previous record of the steel producer was only $7.64.

As steel prices are highly cyclical, it is prudent to expect them to correct towards their historical average at some point in the future. Such a trend will provide a headwind to Nucor. On the other hand, the company is ideally positioned to profit from the new infrastructure bill. Steel is a major component in buildings, cars, trains and infrastructure and hence the new investments will offset, at least in part, the normalization of steel prices, which is expected in the upcoming years.

Union Pacific (UNP)

Union Pacific is the largest railroad company in the U.S., operating more than 32,000 miles of rail throughout the western two-thirds of the country. The company transports industrial products, agricultural products, coal and chemicals.

The business of Union Pacific is strongly tied to the underlying growth of the economy. The demand for transportation of goods greatly increases during boom times, whereas it significantly decreases during recessions.

Union Pacific decelerated last year due to the coronavirus crisis but it is recovering strongly this year thanks to the massive vaccine rollout, which has put the economy back to its growth trajectory. The recovery is offering a double boost in the earnings of Union Pacific; higher transported volumes and higher prices thanks to strong demand.

In the third quarter, Union Pacific grew its revenue 14% thanks to 4% volume growth and a 9% increase in its average revenue per car load. The strongest trends were evidenced in the transportation of industrial goods, coal and metals, as these are the categories most impacted by the pandemic last year. Union Pacific grew its earnings per share 28%, from $2.01 to $2.57, and thus exceeded the analysts’ estimates by $0.07.

Union Pacific will undoubtedly benefit from the aforementioned infrastructure package. The demand for metals and minerals will increase thanks to higher construction activity. In addition, the fiscal package will offer a boost to the overall economic growth and hence it will provide a tailwind to the house market. As a result, the demand for transportation of forest products is likely to improve.

As the demand for transportation is closely tied to the underlying economic growth, it would be natural to expect Union Pacific to be highly cyclical. However, the company is the largest railroad in the U.S. and thus has a dominant position, with strong pricing power and great economies of scale. It has thus grown its earnings per share by 9% per year on average over the last decade. Even last year, which was marked by the severe recession caused by the pandemic, Union Pacific incurred just a 3% decrease in its earnings per share. Even better, it is on track to grow its earnings per share by approximately 25% this year, to a new all-time high.

Final Thoughts

The recent infrastructure bill will be a major growth driver for the domestic economy in the upcoming years. Therefore, investors should try to select some stocks that will benefit from that tailwind. Caterpillar, Nucor and Union Pacific will certainly enjoy a boost in their businesses thanks to the new fiscal package.