With Federal Funds Looming, This Firm Is Ready to Upgrade Crumbling Roads

America's infrastructure is crumbling...

In fact, the American Society of Civil Engineers ("ASCE") has given it a C-minus.

While that's still a passing grade (by most standards), it's hardly a ringing endorsement of U.S. infrastructure. According to the ASCE, 43% of America's roads are in "poor or mediocre condition."

This has fueled the bipartisan push for major infrastructure spending. And the full passage of a federal bill is getting closer and closer...

Earlier this month, the Senate passed a $1 trillion infrastructure bill and sent it to the House of Representatives for a vote. This followed a long period in which both sides pushed for infrastructure investment, but couldn't agree on exactly how to spend the money. In the agreed-upon bill, about $110 billion will go toward improving "physical infrastructure," like roads and bridges.

Today's company should be a key beneficiary of those dollars...

Construction Partners (Nasdaq: ROAD) is a $1.75 billion civil infrastructure company focused primarily on building and maintaining roads. It offers a variety of services for public and private projects involving highways, bridges, airports, and commercial and residential developments.

Here are its main business activities...

• Making and distributing hot-mix asphalt

• Paving roads

• Site development, including the installation of drainage and utility systems

• Mining aggregates, like sand and gravel, which are the raw materials used in asphalt

• Distributing liquid asphalt cement

Construction Partners has more than 2,300 employees who work on infrastructure projects and operate 52 hot-mix asphalt plants, 14 aggregate-mining facilities, and one liquid-asphalt terminal.

Public projects account for the majority of its revenues, while private projects make up about a third of sales. The company recently reported third-quarter revenues of $261.7 million – an increase of 20.6% compared with the same period last year. Construction Partners' biggest customers are state departments of transportation (DOTs), which benefit greatly from infrastructure bills.

And even with those large public clients, Construction Partners avoids the potential losses that usually come with substantial contracts. That's because it executes an effective acquisition-growth strategy in an otherwise fragmented industry.

Aggregate rock and asphalt can only be profitably transported over compact geographic areas, typically covering just one or two counties. So there are thousands of paving operators across the country. And to Construction Partners, these operators are ripe for consolidation.

What's more, Construction Partners is emerging as the consolidator of choice among its targets. It has acquired dozens of businesses since its founding in 2001. And earlier this month, it announced the acquisition of nine more plants and facilities.

Those business owners note that Construction Partners closes transactions quickly, keeps employees in their jobs, offers opportunities for professional advancement, and provides capital to help newly acquired businesses grow organically.

And the COVID-19 pandemic has done nothing to slow down its acquisitions. Construction Partners is one of the only players in the civil infrastructure industry that can afford to expand during less-than-stellar market conditions. On top of that, customer demand, project funding, and bidding activity remain strong.

But it hasn't been easy goings for Construction Partners in recent months. Like many companies, it has dealt with supply-chain issues. Construction Partners recently reported project delays impacting its own operations, as well as those of its subcontractors.

But these issues are expected to be short-lived. Construction Partners said that supply-chain disruptions will continue to ease from here, before disappearing completely in 2022. This improvement will help the company begin to work through its backlog of orders, which hit a record $823 million at the end of June.

Beneath the surface, Construction Partners is a strong business...

It produces plenty of free cash flow ("FCF"). FCF is the cash a company generates in excess of all the expenses, taxes, and investments it needs to maintain operations and grow the business. Construction Partners can gush FCF, though the number has fallen in recent years. This isn't a problem, though... It has nothing to do with the underlying business. Construction Partners is just ramping up its acquisition strategy.

It also has a great balance sheet...

Over the past two years, Construction Partners has typically had more cash on its balance sheet than debt. And when debt came in above cash, Construction Partners had more than enough earnings to cover the interest payments on its debt. That's a sign of a well-managed company.

At the end of the day, Construction Partners is a great, growing business. It's also part of an industry that is set to benefit from an influx of federal funds in the coming months... as roads and bridges are upgraded. We can see that already playing out in the company's record backlog. A federal infrastructure package will only serve to boost the tailwind for Construction Partners.

Sometimes investing is simple.