Miller/Howard Investments
Miller/Howard Infrastructure Series
Part 2: Why Infrastructure?
What are some macro growth drivers in the space?
Bryan J. Spratt, CFA, Portfolio Manager/Research Analyst  |  Full Bio (PDF)
Part 1: Infrastructure
Part 2: Why Infrastructure?
Part 3: Investor Concerns, Investor Benefits

I'd like to talk about each of the categories because each investment bucket has very identifiable macro growth drivers. You can't always say that about every sector in a broadly diversified strategy, but for the areas that we focus on in the Infrastructure strategy there are significant macro tailwinds.

In the case of utilities there has been a substantial replacement cycle, the retirement of coal plants and building of natural gas fired electricity generation, and more recently a significant amount of renewable projects. There's also been a concerted effort to expand and upgrade the power grid. Also, in the case of utilities, which operate in an allowed return on equity business model, they have to spend money to make money. We've seen above-average growth drivers for utilities, and we expect this to continue.

In the case of energy infrastructure, we've talked with one of my colleagues in the past about Drill Bit to Burner Tip®, discussing the shale revolution and the ability to get BTUs out of the ground more economically in this country. This has had a profound impact on our energy infrastructure needs. The opportunities have been great, and we believe they will continue.

Earlier I mentioned e-commerce and transportation. Clearly, the flexibility to get products from Point A to B and, in many cases, directly from the factory to the end retail customer is kind of a marvel when you think about it. This capability requires a significant amount of infrastructure.

In the case of communications, we think this is one of the bigger opportunity sets, and we've been adding to our portfolio's exposure. This group includes the network owners like AT&T, Verizon, and Vodafone, as well as the tower companies and the small cell deployers like Crown Castle and American Tower.

In the 1990s a lot of people talked about technology convergence, and in some ways it didn't really take shape until we got the smartphone, in my opinion. The smartphone is probably one of the best representations of technology convergence that was the vision 20 or 25 years ago. It took tens of billions of dollars spent on network infrastructure to make it reality.

Today there's been a lot more talk about the network upgrade cycle to 5G. The transition from 4G or LTE, long-term evolution, is barely complete, and yet several companies provided color on 5G capex plans earlier this year. 5G is the direction that we're heading, and it will be the first network designed for cloud computing. 5G will allow the Internet of Things to really take shape, and it could unleash the real power of the Internet.

Enabling companies that feed into 5G deployment should also benefit. These include companies like Qualcomm on the chip side or maybe Dycom [Industries], a stock that does the physical installation work. Another example is Crown Castle just laid out plans for 25,000 small cell sites. The idea of densification that Verizon and AT&T have been talking about for a couple of years is starting to really take shape. The capability allows for the possibility to have things like the autonomous car, and this infrastructure is being placed today for the future. This is a pretty exciting opportunity set and it's a powerful dynamic in the strategy, so stay tuned.

Now that I've mentioned the growth drivers for utilities, energy infrastructure, communications, and transportation logistics, the fifth category that we focus on is enablers. These are the companies that will provide the products, the innovation, and the physical work. Think of pick-and-shovel type companies. They are benefiting all across the infrastructure opportunity set.

This is a highly regulated, capital intensive, and very long planning cycle segment of the economy. So you can't get around the fact that politics play a role. Clearly, the current administration has highlighted infrastructure as part of the pro-growth agenda and has made certain changes that I think have been supportive. Having said that, there was already a significant amount of groundwork in place when you think of renewables and the explosive growth that we've seen in this country.

The US is an emerging market, if you will, in renewables simply because we have 30 separate states and Washington, DC that have different renewable portfolio standards and tax incentives that encourage the use of renewables. Production tax credits and investment tax credits for solar and wind were already in place to provide a multi-year tax sponsored, tax stimulated program to build out more renewables in this country.

In the communications area, there are some possible changes that could occur because of new leadership and staff at the FCC. We'll have to stay tuned on that. But issues such as net neutrality and the policy around it could have a pretty profound impact on the winners and losers in the future. The policy resolution is not exactly obvious, but we think it's reasonable to expect the companies that have spent significant amount of capital in positioning themselves will benefit. We have positioned the portfolio accordingly.

Tax policy has historically been one of the biggest—you could use the term—'nudges' for the economy. We've seen that in a dramatic way in renewables, for example. The idea of a tax holiday for repatriation of foreign cash with some of that cash going into domestic infrastructure would be a positive catalyst for the group. When you think about the direction of regulatory bodies like the FCC or FERC with nominated leadership and staff that are more pro-growth, pro-business, and have more supportive leadership, this should have a positive impact on policy. It doesn't radically change how things ultimately get done, but it should change the pace on new projects.

So, yes, policy could have a pretty dramatic impact. But I would just point out again that this is our longest-standing strategy. We have core competency in these highly regulated types of companies and industries. We've been successful at navigating different administrations, different market cycles, as well as shifts in technology and shifts in different areas of the infrastructure space for over 25 years. We believe we have the skillset to continue to do so.


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