April 2025 Vol. 80 No. 4
Features
Utility and communications construction update
Daniel Shumate, Managing Director, FMI Capital Advisors Inc.
Volatility! The trading of the stock market in the first weeks of April moved news about the market from the financial section to the front page. While I keep an eye on public stock market activity, most of the work I do is with companies operating in the real world whose value is not tied to trade activity. They earn their cash through building and repairing necessary infrastructure to deliver power, heat, water and communication.
While the final plan for tariffs from the Trump Administration is unknown, the initial rollout shocked investors and caused a flurry of market activity. This will likely continue until a stable plan that is being strategically implemented has been negotiated. Because of the on-again, off-again approach to tariffs to start 2025, limited impact to prices or inflation has been seen in the data to begin the year (and thus has not yet impacted “main street”). However, the tariff strategy by the Trump administration will have an impact on prices as the year progresses, especially on those good imported from China.
The industry learned many valuable lessons in the aftermath of supply shocks from COVID and for the contractor, one of the most impactful was that it takes time for shocks to material costs (up or down) to work their way through the system. For investor-owned utilities, rate cases over several years are necessary to fully reflect the increased price environment. For municipalities, change orders and new bond offerings may be necessary to secure the funds to complete planned projects. If the United States saw significant price increases due to tariff policy, we would expect a slowdown in work because the materials cost would limit the amount owners can spend on engineering and construction.
Outside of trade policy, we continue to monitor how seeking waste, fraud and abuse by DOGE could impact the availability of funds for infrastructure improvements. Thus far, the efforts have been across other branches of government. Federal policy appears to have a concerted effort to make things easier to build. Final deployment of Federal programs like BEAD continue to move forward and could begin to impact spending in the communication segment next year. Interstate transmission infrastructure appears to be moving forward more rapidly as well, which would be a welcome change from the new administration.
The Utility & Communications Construction Index (UCCI) below presents the stock performance of the sector’s publicly traded stocks over the past quarter, the past year, and the prior three years. In the first quarter of 2024, the UCC Index experienced a greater decline than the broader market, but the companies had been trading higher than the S&P 500 for much of the last three years (see Figure 3). Comparatively, the UCC Index was down -27.3 percent vs the S&P 500 that fell -13.7 percent over the same period. Volatility will impact the market performance through June (and beyond) while the Trump administration defines the global trade rules.
The first quarter of 2025 saw a decline in closed transactions after a flurry of activity near the end of 2024. While expectations for the industry remain high (especially compared to other sectors), new polices of the Trump administration and a better understanding of the cuts the DOGE team will make may have impacted sentiment. The long-term trends of utility infrastructure repair and replacement and electrification of the power grid continue to drive activity. Additionally, the amount planned to be spent on the power delivery and water and wastewater segments continue to drive interest in investment by private equity. We expect continued interest in the underground infrastructure space as repair of the nation’s infrastructure remains a bipartisan priority within Congress.
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