These Materials Suppliers Will Prosper if Trump Delivers $1 Trillion Infrastructure Injection

Here's one for fans of irony: Mexican cement provider Cemex (CX) is likely to be one of the biggest beneficiaries of Donald Trump's planned $1 trillion investment in U.S. infrastructure, according to analysis by French broker Exane BNP.

The San Pedro Garza Garcia-based group could add about 35% to its earnings per share by 2020 if the President-elect delivers on his plan to overhaul the U.S.'s creaking bridges, overstretched airports and potholed roads.

The project would also provide a major boost to European building products groups, notably Greece's Titan Cement (TITCF) , where earnings per share could rise by just under 50% by 2020, Italy's Buzzi Unicem (BZZUF) , up more than 30% and Ireland's CRH (CRH) up by just over 20%, noted Exane BNP.

Trump's plan "could theoretically increase U.S, infrastructure capex from $200 billion to $450 billion per annum," wrote Exane's Paul Roger, Yassine Touahri and Yves Bromehead. "If delivered, it could materially boost building materials demand and support much higher prices in an already-tight market."

Details of the plan remain vague. Trump's website cites the headline $1 trillion figure but offers no breakdown of spending. Comment on the investment plan were also missing from the Republican's first video outlining his immediate priorities.

Taking the promised injection at face value, and adding it to the "FAST Act" investment in U.S. highways (which will boost infrastructure spending by about 4% a year until 2020), could mean an increase in building material sales volumes of 5% next year, 8% in 2018 and 10% in 2019 and 2020, according to Exane BNP.

That increase in volume would likely be accompanied by a 1% average increase in margins for building materials, though supply constraints in cement could push prices in that sector higher still.

That could boost Titan's Ebitda by 32% by 2020, while Cemex and Buzzi Unicem could gain 17% and 27% respectively over the same period.   

Trumps plan could yet encounter political, legal and market problems.

The President-elect's own Republican party has traditionally opposed high deficit spending, and as recently as 2014 overwhelmingly voted against an Obama initiative to increase the debt limit.

Claims from the incoming administration that much of the cash for the plan will come from private sector suggests that there will be delays to the investment. The U.S. has no legal framework for so-called private-public partnerships, meaning new regulation would have to be enacted before investors can be brought on board.

Rising bond yields, notably since Trump's victory, and the near-certainty of an increase in rates by the Federal Reserve could also weigh on the attractiveness of infrastructure investment. Infrastructure tends to provide a relatively low if steady rate of return, making it an attractive alternative in a low rates environment but less appetizing if rates are increasing.

Finally there is significant risk from market constraints.

"Utilization rates are above 80% in U.S, cement, for example, and the economy is close to full employment. It is not clear how the industry could supply the extra demand even with imports, given port capacity constraints," noted Exane BNP. "There is a risk stimulus therefore just pushes up prices. There could also be a conflict between President-elect Trump's immigration policies and the need for more blue collar workers to build the infrastructure."

Yet, for investors willing to take Trump at his word, the upside potential is significant.

"Most (heavy construction material) stocks would look very cheap in a fiscal stimulus scenario, especially on medium term multiples," noted Exane BNP.

The bank's top picks, taking into account both the stimulus and existing price targets, are Buzzi Unicem, which it awards an upside of 64%, Titan with an upside of 67%, Cemex 52% and Germany's Heidelberg Cement (HLBZF)  with 46%.

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