- The Infrastructure Investment and Jobs Act of 2021 allocates $110 billion to fix America's roads and bridges.
- The infrastructure spending is set to accelerate next year, increasing demand for asphalt.
- Ingevity's asphalt, oilfield, and automotive solutions suggest investors may be undervaluing its opportunity to increase revenue and profit.
One of the most significant investment trends in the coming year could be buying stocks poised to benefit from increased infrastructure spending associated with the Infrastructure Investment and Jobs Act. The law provides $1.2 trillion (yes, with a “t”) in federal money for infrastructure, including $550 billion in new spending. The funds will be doled out over the next five years, with the pace accelerating as early as next year.
Last week, I highlighted why Vulcan Materials (VMC) leading position in aggregates used in road, bridge, and transportation construction made it worth targeting. Today, I’m focusing your attention on another stock that will benefit from the infrastructure bill, Ingevity Corporation (NGVT) .
How Ingevity is Disrupting Infrastructure
Ingevity was spun-off by paper and packaging company Westvaco (now Westrock) in 2016. It operates in two business segments: Performance chemicals and Performance materials.
The performance chemicals business markets products derived from crude tall oil and lignin, co-products of turning pine trees into pulp. Those products target the pavement technologies and industrial specialties markets. It also sells caprolactone-based engineered polymers.
Customers use the company’s pavement products to create and recycle asphalt paving. For example, Evotherm is an additive that reduces production temperatures, lowers fuel use, and extends the paving season into colder months. It also markets emulsifiers for pavement preservation and recycling additives, reducing costs and completion times by reusing existing asphalt.
Industrial specialties include adhesive chemicals, such as those used in road markings. Additional industrial products include lubricants, inks, and chemicals to improve oilfield equipment uptime and the drilling mud used to manage fluid control, particularly in shale projects.
The performance materials segment markets activated carbon from hardwood sawdust, primarily used in auto and truck emissions systems to recapture and reuse gasoline vapors.
Why is Ingevity Stock a Buy Now?
Ingevity’s exposure to the oilfield business means it benefits from increasing well activity due to high crude oil prices. It’s also starting to benefit from auto production rates returning to normal because of easing supply chain delays, which have handicapped automakers this past year. Finally, the Infrastructure Investment and Jobs Act of 2021 earmarks $110 billion for roads and bridges, so there should be more demand for chemicals used to make and recycle asphalt.
Investors may also be undervaluing these potential drivers of revenue and profit.
In “This Under-the-Radar Stock Has the Right Chemistry,” Real Money Pro’s Paul Price explains why he believes Ingevity is an overlooked gem. He writes:
“Ingevity is not well followed by the investment community. That makes it possible for its shares to get inappropriately undervalued like it is today…Over the past six years, all major business metrics surged as detailed below. If this year's estimate proves accurate, EPS and cash flow per share will both have grown by over 250%. Book value will be more than 550% higher…Shares outstanding are down by almost 10% over that period as well, helping juice earnings per share…Surprisingly, continuous shareholders have only earned 74.1% from exactly six years earlier. That is due strictly to price-to-earnings compression. NGVT commanded $120.40 (24.4-times earnings) in early 2019 yet is offered right now for less than 12-times this year's estimate…That illogical share price action is unlikely to last. A large "catch-up" move higher is typically how discrepancies like that are resolved.”
Despite sales doubling and EPS and cash flow skyrocketing since 2016, the stock’s current $72 price is significantly below its peak of nearly $120 in 2019. The lower share price is despite management's buyback program. Year-to-date, Ingevity has repurchased $90 million in shares, prompting it to boost its authorization to $500 million.
If investors warm up to the company because of accelerating infrastructure spending from the passing of the bipartisan infrastructure bill, a return to historical valuation could result in a healthy double-digit return.
Back to Price: “Throw out the Covid year of 2020, and NGVT's long-term average price-to-earnings was 20.4-times…NGVT has only had lower P/Es than now twice in history…The first instance came at the Covid-panic low. Astute buyers who picked up shares near $25 were delighted to see almost $90 about a year later. The second time came in March of this year, with NVGT at $56.30 (9.2-times 2022 EPS). As recently as Aug. 12, NGVT changed hands at $75.11 intraday. That represented a 5-month, 33.4% bounce…I'm conservatively using a 19 P/E to call for $120.65 for NGVT by the end of 2023.”
The Smart Play
Last quarter, Ingevity reported sales of $420 million (a record), up 17% year over year, and EPS of $1.73, up 12% from last year.
The top line benefited from a 28% increase in performance chemicals revenue to $298 million, driven by record sales (+38%) in industrial specialties (thanks in part to growing demand in oilfield services), a 21% increase in engineered polymers, and a 15% increase in pavement technologies.
Performance materials sales fell 3% because of Asian manufacturing lockdowns and supply chain woes, offset partly by higher carbon demand in the U.S. because of the improving availability of semiconductors. So, if automotive production improves in Asia and keeps trending up in the West, the drag last quarter could turn into a tailwind next year, further propping up revenue.
The company should also benefit from its recent acquisition of Ozark Materials, a leader in pavement marking materials, including waterborne paints and long-lasting thermoplastic pavement markings. The deal is immediately accretive to earnings. Further out, it recently invested in EV-battery play Nexeon. Nexeon is working on more efficient batteries that will incorporate Ingevity's active carbon.
The strong showing last quarter (and its accretive acquisition) has resulted in analysts bumping up their forward earnings estimates. That’s a bit of a rarity nowadays. Analysts are reducing outlooks at most companies because of shrinking margins caused by inflation and lower demand caused by decelerating GDP.
Analysts are looking for Ingevity to deliver EPS of $6.13 this year, up from $6.01 30 days ago. Next year, they’re modeling for $6.85, up from $6.73 last month. If we apply Price’s 19 multiple on next year’s estimate, we get a target of $130, up 79% from where we sit today.
Of course, no rules require stocks to trade back to historical multiples, yet that’s a compelling potential “reward.” The risk isn’t horrible, either. Shares have held the mid to high $50s since April, so if we assume that continues, our downside is about 20%. Active investors could consider a tighter stop loss, though. Shares are currently above the 21-DMA, 50-DMA, and 200-DMA. Of the three, the 50-DMA represents the lowest price at about $66, or about 9% below where we’re currently trading.
If you’re interested in adding Ingevity to your portfolio, consider spreading your buys into multiple transactions. For instance, if you’re average weighting is 3%, you could buy 1% near here (slightly above its 21-DMA), then look to add on a pullback to the 200-DMA and 50-DMA, or average up if shares breakout above $76, which is is slightly above where it stalled both in June and August.