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Arcosa, Inc. (ACA) - Wall Street’s Best Digest Daily Alert - 2/10/21

This infrastructure company is expected to report earnings per share of $0.41 on revenues of $457.6 million, for its fourth quarter.

This infrastructure company is expected to report earnings per share of $0.41 on revenues of $457.6 million, for its fourth quarter.

Arcosa, Inc. (ACA)
From Cabot Stock of the Week

Arcosa was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Investors who are looking for a modestly conservative stock with both growth and value attributes should take a closer look at Arcosa.

The company, which has a market cap of around $2.7 billion, caught my eye because of its end market exposure to infrastructure and clean energy, both of which should be strong markets in a recovering economy. I’m also impressed by the strength Arcosa’s stock has shown since it spun off from Trinity Industries (TRN) in November 2018, and I like that the small cap stock generates huge EPS numbers.

What does it do?

Arcosa provides infrastructure-related products and solutions to the construction, energy, and transportation markets in North America. Growth should be strong in the years ahead as the U.S. seeks to replace and improve its aging transportation and energy infrastructure, while growing the mix of clean and renewable power generation.

Arcosa’s biggest segment (46% of revenue) is Energy Equipment, which makes wind towers, steel storage tanks (for propane, ammonia, etc.) and electric utility structures.

The Construction Projects segment (28% of revenue) supplies a variety of aggregates (sand, gravel, limestone), specialty materials (lightweight aggregates for roads, bridges, green buildings, etc.) and steel and aluminum trench shoring and shielding equipment (for protecting in-ground construction/utility-related holes and trenches from collapsing).

Finally, the Transportation Products segment (26% of revenue) makes barges and marine hardware, as well as products for railroads (railcar coupling devices, axles, etc.).

Since the 2018 spin-off from Trinity, Arcosa’s management team has executed on its growth plan across all three divisions. It has completed growth-oriented acquisitions, added new product lines, expanded manufacturing capacity and geographic reach, and managed to grow profit margins.

Even with the pandemic, revenue over the last twelve months (ending September 2020) was up 11%. Analysts see full-year 2020 revenue up by 12%, to $1.9 billion while adjusted EPS should be up 7%, to $2.52. Arcosa pays a small dividend of $0.20 per year.

In the near term, I expect Arcosa to focus on its construction and energy divisions, with projects related to the 5G telecom buildout and renewable power distribution making headlines.

On the flip side, the transportation products business may deliver mixed results as higher demand for certain things (like grain) is offset by lower demand for others (crude oil and refined products).

Add it all up and analysts currently see growth in 2021 being flat on both the top and bottom lines. That likely reflects conservative estimates as there isn’t a lot of good news baked into the current stock price. This is a story that, over the next couple of years, should go from mediocre to good, and possibly even to great. Both of those scenarios should translate to significant capital gains.

Finally, I suspect that with the new administration focused on getting the economy going again, a (hopefully) easing pandemic, and access to low-cost financing, Arcosa will be relatively aggressive in pursuing growth opportunities. That could bump up growth estimates as we move further into 2021 while also bringing bigger investors into the stock.

ACA came public in November 2018 when it was spun out of Trinity Industries near 26. While there were some dips, the stock did well and was trading near 48 in February 2020 just before the pandemic hit. ACA bottomed at 28. The recovery began with fits and starts but smoothed out last summer and ACA reached its pre-pandemic high by early September.

There have continued to be some surges and dips since, and ACA has mostly held above its 50-day line. The occasional retreats have been in the -7% to -14% range. With ACA currently trading 11% below the all-time high of 64, which was recorded on January 14, it appears the window of opportunity to start new positions is open. The estimated Q4 2020 earnings date is on February 26.

Timothy Lutts, Cabot Stock of the Week,, 978-745-5532, February 1, 2021