But first, let’s look at the problem…

In 1956, President Dwight Eisenhower signed the Federal-Aid Highway Act, which authorized a plan to build 40,000 miles of Interstate highways to be built. Since then, more than 20,000 miles of highways — maintained mostly by the Federal government, but with assistance from the states — have been added. But this amount is obviously not enough. (If you have ever traveled on one of these Interstates in any city during rush hour, you know what I’m talking about)

In about 13 years, 90% of urban Interstates will be at or exceeding capacity, according to the American Association of State Highway and Transportation Officials’ February 2007 report. Also, the demand of new vehicle miles traveled will go from 690 billion in 2002 to 1.3 trillion by 2026.

At the rate this is going, this means that our current road capacity will have to be doubled in the next 20 years.

Billions of dollars will be spent over the next 20 to 30 years to repair, update and build new roads and bridges. The estimated total is $155 billion. This money isn’t going to go into the same old road technologies that are leaving us with constant repairs and construction like the current ones do.

New technologies, coupled with new materials, give way to things such as quieter highway noise and better drainage of rain and snow. Highway barriers, both in and out of construction zones, use billions of tones of cement. The barriers are also built using steel rebar for support, in case a car hits them.

This new street-making technology also impacts these highway barriers. Now construction companies are finding a cheaper and more durable material to replace rebar. It’s called engineered structural mesh (ESM). ESM is pre-stressed and pre-tensioned steel bars used to support concrete structures such as road medians. Approximately 38.4 tons of ESM are used for every mile of median. Even if half of the required new roads use a concrete median like this, that’s 1.9 million tons of ESM.

And there’s only one company that can handle that load. In fact, this $330 million company has the market cornered.

The company is called Insteel Industries, Inc. (IIIN: NASDAQ). It produces the steel that reinforces just about any type of concrete structure, everything from road medians, to bridges, parking decks and concrete pipe.

It produces the ESMs for highway medians and makes the steel used in bridges. Insteel makes all the concrete reinforcement for these massive structures. According to Insteel’s annual report, over 30% of all bridges in this country are either structurally deficient or functionally obsolete. That, along with the construction of new bridges, will give Insteel a lot of work. But for whatever reason, Wall Street has completely ignored this company.

No one wants to invest in anything to do with building or construction because of its association to the current housing bust. This is simply a mistake. Only 20% of Insteel’s business comes from residential building materials.

The other 80% of Insteel’s business is from nonresidential customers such as pipe manufacturers and bridge builders. These businesses are untouched by the falling residential-construction industry.

It’s always nice to find a beauty like this when Wall Street forgets to look at what a company actually does instead of what it assumes.

Sincerely,
Jim Nelson
June 26, 2007

P.S.: Just when you thought we were finished with plunging property prices…think again. There’s a brand new wave of housing-price destruction on its way.

Investing in Federal Construction Projects was originally featured in the Penny Sleuth.