Infrastructure bill: ‘Caterpillar sees the most benefit,’ analyst says

Cowen Director & Equity Research Analyst Matt Elkott speaks with Yahoo Finance Live about the implications of the new infrastructure bill.

Video transcript

- Welcome back. The US House of Representatives late last week passed a more than $1 trillion infrastructure bill that includes more than $550 billion in new spending. For more on how machinery and transportation companies specifically are going to be impacted, we're welcoming in Cowen director, Matt Elkott. And Matt, I first want to get your take on the infrastructure bill broadly. Were there any surprises here for you in terms of what was included in this and where the spending is going to be directed?

MATT ELKOTT: Hi, Emily, and thanks for having me on. Not many surprises it's fairly in line with expectations, I believe. I would say that after the Senate approved the bill a few months ago, there was probably-- there was consensus that it would become law at some point. And then after the infighting within the Democratic party in the ensuing months, I would say that the consensus became near-consensus. So I think the event today is that the bill is passed, so you know, it was a near-consensus, not a full consensus. And then-- I'm sorry, Emily, what was your initial question?

- Yes, just asking broadly were, you surprised about what was actually included in this bill and where the spending is actually going to be directed?

MATT ELKOTT: Yeah, exactly-- so no big surprise about the contents of the bill. Just, you know, the fact that I think it was near-consensus before it was approved on Friday, not full consensus. As far as the impacts on the companies, I would say within our coverage of machinery and transportation OEMs, Caterpillar probably sees the most direct benefit in their North American construction industry segment. A lot of these projects will begin with digging or filling or demolishing or flattening earth, and you know, that's-- that's a direct benefit to their due to their construction equipment segment.

And then there will be some longer-term benefits and their mining segment. You guys were speaking about the greenhouse gas emission reduction initiatives in the bill. So you're going to need copper and nickel, lithium for-- for those initiatives long term. So that should benefit their mining equipment business. And then their transportation business, which is-- they're the second largest locomotive manufacturer in North America-- that should also see indirect benefits from the movement of aggregates and building products and metals on rail.

- And Matt, let's talk about some of the others besides Caterpillar. I mean, I think Caterpillar, we think about pretty top of mind when we talk about these various initiatives. We also-- you also have some others that you mentioned in your note today. One of them is Wabtec, I believe. Talk to me about how-- how they fit into the-- the infrastructure package.

MATT ELKOTT: Mm-hmm. Well, so like I mentioned, Caterpillar is the second largest locomotive manufacturer. Wabtec Is the largest locomotive manufacturer in North America, because they bought GE Transportation a couple of years ago. So they'll-- they'll see that indirect benefit in-- in their rail segment. But they also have a transit business. About 35% of their total company revenue is transit in the US. It's probably about 10% of their total revenue.

So there are $39 billion in the bill for public transit, and there is another $66 billion for freight and passenger rail. So they'll see benefits in content in-- in newly ordered rail cars and rehauled rail cars. They'll see content in new locomotives. They also have a battery electric long-haul locomotive. They're the first to introduce one in North America. It was tested several months ago with the BNSF, so that should be a beneficiary of some of the greenhouse gas emission reduction initiatives in the bill. Although that benefit would probably be back end loaded. We probably won't be able to see any material revenue, incremental revenue for a few years from that flex drive locomotive.

So Wabtec will see benefits in our transit business, they'll see benefits in their rail business. But you know, we're not expecting anything material for anyone in our coverage until late next year or early-- early 2023.

- And Matt, also just wanted to ask more broadly about some of these supply chain disruptions that of course, have been hitting Caterpillar and a number of other industrial companies as well here. What do you make of where these companies are headed in terms of being able to navigate this? Because one of the things that they mentioned was that end user demand was still staying pretty strong here. It really is just about their ability to meet some of that demand.

MATT ELKOTT: That's-- that's true, Emily. I mean, the supply chain disruptions, there are some early signs of hope we've heard from some companies, but they are still pretty challenging. So I think some of this demand will just-- will be pushed out until later quarters. The risk that I worry about the most is if the supply chain disruptions persist long enough to actually cause demand disruption-- how much longer are you going to wait for that couch that you ordered six months ago. Maybe, you know, the risk is you might call and say, just cancel my order.

So I worry about that. But you know-- and there really isn't a great way to gauge whether there will be demand dis-- disruption. If there's no demand destruction or material demand destruction, the cycle will be pushed out for many industrials until the second half of next year and into 2023. For instance, for the class eight build cycle, just a few months ago, 2023 for many people was a down year in the build cycle. Now 2023 is an up year just because we-- we took a hit in this year, and it's going to cause builds to move out to 2022 and into 2023. So I think the effect you'll see is the cycle getting pushed out to next year and into 2023.

- All right, we'll leave it there. Cowen director, Matt Elkott, thank you so much.