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Just what kind of company would be considered an infrastructure play? -- Z.P.

The roads we drive on, the electricity we use, even the lines of communication that bring Web sites like this to our computers: infrastructure is a major part of our everyday lives. These days, though, the private sector is becoming increasingly responsible for infrastructure. Does this make infrastructure a good investment? Let's take a look.

What Is Infrastructure?

Generally speaking, infrastructure is the group of facilities that support networks and systems in our society. To be more specific, infrastructure includes things like transportation systems, communication networks and utilities. And while we often attribute the building and ownership of infrastructure to governments, you might be surprised at just how many companies have a hand in the creation, maintenance, and ownership of infrastructure, both domestically and abroad.

Because infrastructure encompasses so many different kinds of networks and areas of expertise, it can be hard to define the types of companies that deal with infrastructure. Of late, there has been a push to invest in companies that control transportation infrastructure (for example, roads and highways), but we will get into those companies in a little bit. For now though, let's look at what makes infrastructure a new "it" investment.

Why Is Infrastructure a Good Play?

There are a few factors that help make infrastructure a special investment case. First is the need for the private support of infrastructure. While things like road and sewage systems have, in the past, been supported by public funds, there are a lot of infrastructure elements that we're accustomed to using that are actually private investments.

Like what?

To a large extent, communication lines and many kinds of utility infrastructure (like power lines) have been owned privately by the telecommunication companies (or "telcos") and the utilities that service them. For example, your cable TV system is an element of infrastructure, and your cable company owns those lines of content delivery. The move toward private investment into public-use infrastructure such as the highway system is helping the infrastructure realm grow at an impressive clip.

Infrastructure lends itself to nice, steady returns over the long haul. When you invest in infrastructure, you're investing in a long term, fixed asset . And it's that underlying concrete asset that makes infrastructure investments look very attractive.

In a recent BusinessWeek article, James Holloway pointed out that "infrastructure assets are long-lived, with bond -like characteristics; namely, stable cash flows linked to inflation ." He also noted that competition isn't much of a concern for infrastructure companies. All told, infrastructure's benefits are pretty compelling.

Which Companies Deal With Infrastructure?

There are a few heavy hitters in the infrastructure business. These include Macquarie Infrastructure Company ( MIC), an operator whose infrastructure trust is listed domestically; heavy construction contractors and equipment manufacturers like Caterpillar ( CAT), Deere ( DE), and Chicago Bridge & Iron ( CBI); and, of course, materials and engineering firms like Cemex ( CX) and WillDan Group ( WLDN).

The majority of these companies' connections to infrastructure are based on a couple of things (read on). However, operators like Macquarie own (or lease in many cases) those really long term assets that are associated with infrastructure.

The Changing Tide of Infrastructure

As "fixed" as infrastructure seems, there are changes afoot with the infrastructure names mentioned so far. It seems as though any time we turn on the TV we hear about standards changing or bridges and roads needing to be replaced. (It's something I've personally witnessed quite a bit of recently, as has everyone in the Baltimore-Washington corridor, where they seem to be redoing every road in the tri-state). A lot of infrastructure needs to be replaced now.

As American roads, bridges, and tunnels approach the ends of their expected lives and emerging markets like China require new structures and systems built from scratch, companies like those engineers, contractors, and equipment manufacturers are finding that their business is in high demand.

But infrastructure operators like Macquarie are looking toward a new and different source of income: the privatization of roads, highways, bridges, and the like. Governmental organizations are realizing that one of the best ways to complete a public works project is to lease it to the private sector. Not only can this free up a lot of money to be used elsewhere, it also often results in better-managed toll roads and bridges. According to Holloway's article, this is just what Chicago did with its Skyway Toll Road this summer. Pennsylvania is considering something similar for the Pennsylvania Turnpike. Privatization has become a new means of creative financing for public-use infrastructure.

How to Invest in Infrastructure

There are a few places to turn to if you're interested in investing in infrastructure. The most obvious is the individual stocks of companies like Macquarie, Caterpillar, and Cemex.

But the opportunity to invest in Macquarie's business isn't constrained to its stock; the company also offers a number of closed-end funds that provide exposure to its infrastructure operations. The Macquarie First Trust Global Infrastructure Utilities Dividend and Income Fund ( MFD) and Macquarie Global Infrastructure Total Return Fund ( MGU) are two examples of Macquarie's funds that have each returned in excess of 20% since the start of 2006.

But if exchange-traded funds ( ETFs ) are more your investment style, there's something in infrastructure for you as well. The SPDR FTSE/Macquarie Global Infrastructure 100 ETF ( GII) is an ETF that uses the Macquarie Global Infrastructure 100 Index as a benchmark , while PowerShares Water Resources ETF ( PHO) and PowerShares Dynamic Building & Construction ETF ( PKB) are a couple of other examples of ETFs that follow infrastructure investments. It seems as though more and more new infrastructure investments are being introduced, so keep an eye out.

How to Analyze an Infrastructure Investment

Overall, analyzing an infrastructure-related company isn't much different from analyzing any other kind of company that deals with large amounts of fixed assets (see "Getting Started: Fundamental Analysis" ). However, you should consider consider two things when investing in an infrastructure company: valuation of the actual structure or system, and the real business the company engages in.

Valuation. What value do you put on the Chicago Skyway Toll Road? When it comes to large fixed assets like infrastructure, valuation can be fairly subjective. The only real way around this problem is to make sure that the company you're investing in has experience in the field, and isn't making a colossal mistake when it inks a deal to build, buy, or lease infrastructure. Sticking with big players like Macquarie limits this risk .

Business. Do you know and understand the actual business that the company is engaged in? Let's face it, "infrastructure" can be pretty broadly defined, and it's becoming a really hot investment buzzword. Some companies deal with more risk than traditional infrastructure investments. For example, while a company that owns oil pipelines is involved in infrastructure, its core business is likely oil, and thus is a whole lot more susceptible to the conditions of the oil market.

So there you have it. Those networks of roads, power and phone lines, and yes, even sewers can actually make money for your portfolio . Investing in infrastructure presents a couple of things to look out for, but on the whole, it's pegged by many on Wall Street as a smart investment space for the coming years.

To learn more about infrastructure investing, check out these stories on TheStreet.com:

  • Cramer: Infrastructure Surge Should Hold Up Nicely (Video)
  • Mutual Funds Show Weakness in Infrastructure
  • Concrete Investing: How to Play the Infrastructure Boom

Plus, to search the "infrastructure" portfolios on Stockpickr, click here .
Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.

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