Obama Stimulus II Special Report (Part II): Industrial Infrastructure
Company Descriptions
Investment Thesis: Economic conditions continue to deteriorate as evidenced by the latest release from
the Commerce Department showing GDP declined at an annual rate of 3.8%. Earnings for the industrial
sector as a whole for Q4/08 have been abysmal with substantial earnings misses, conservative 2009 EPS
guidance with limited visibility going forward. Q1/09 will continue to be a brutal period due to the extreme
inventory correction and European and U.S. extended production slowdowns due to diminishing capital
expenditure and a soft demand environment.
We know that 2009-2011 industrial EBITDA will decline, but do not know how much or when the trough
will occur. Our November 2008 report calibrated the industrial EBITDA collapse to a trough in 2011, down
40% from the 2008 peak. Recent industrial company data suggests that the trough EBITDA will be worse
than previously expected as some of our forecasts call for a 44% EBITDA collapse in 2009.
If the trough is deeper, our strategic focus on infrastructure companies will be even more important to our
new coverage selection. We believe that industrial analysts should focus on industrial companies with
good balance sheets and cash flow, cost-cutting actions, operational excellence programs and exposure
to government-funded infrastructure programs. In this report, we discuss the findings from our preliminary
proprietary research of industrial companies with exposure to Stimulus II infrastructure programs.
Special Note regarding industrial stocks with exposure to government funding through the
American Recovery & Reinvestment Act (ARRA) through roads & bridges, electrical grid, water
infrastructure and alternative energy: We are presenting 29 companies that should benefit from the
ARRA with end market exposure between 5-100% of sales. The current timeline for outlays from the
ARRA calls for 75% of funding to be deployed within the first 18 months of passage of legislation, which is
still on course to be enacted by the President’s Day Congressional recess. ARRA legislation contains
provisions to deploy funding in some cases within 90-120 days of passage of legislation. From that
perspective, we have categorized the following companies with respect to our estimates on when
companies could potentially see funding for projects from the ARRA. In this report, we also decompose
company revenues with respect to geographical sales/revenue mix, business segments and estimated
sector (end user breakdowns).
Early Stage: Companies that perform contracting work on shovel ready projects should see funding after
the contract bidding process and begin sometime between May/June. Construction projects are likely to
complete contract bidding first, as there are significant state backlogs for highways, roads and bridges
and water infrastructure that merely need funding and contract bids before launching.
Mid Stage: While highway and road construction projects should see funding throughout the first
eighteen months of the ARRA, some water infrastructure projects may require ecological impact studies
which will extend the timeline for completion of such projects. Funding mechanisms for Clean Water and
Drinking Water State Revolving Funds will likely call for a longer timeline as funding must pass from state
budgets to municipal projects. Electrical grid projects will be completed on a longer timeline as private
utilities and privately-owned transmission lines must go through separate funding processes. While ARRA
legislation does call for deployment of funding within 180 days, in cases where the contract bidding cycle
may be longer, funding may be extended past the initial 180 days of ARRA enactment. Companies that
will see project funding in mid-stage should see tailwinds towards September/October.

Late Stage: While government funding heavily stresses deployment of funding within 180 days in many
cases, the Congressional Budget Offices and Congressional Appropriations Committees have scheduled
funding to be spread throughout 2009 and 2010. We view late stage companies as having exposure to
potential construction projects involving transportation, water and electrical infrastructure that have not
received funding during 2009.
In this report we present the geographic, segment and sector data from 29 companies we expect
to mitigate the current industrial decline with Stimulus II related infrastructure revenue. The
following 11 companies are our best picks from within the group due to percentage of
infrastructure revenue, cost-savings programs or a combination of mitigating factors. In short, we
will focus our initial in-depth company research on the following infrastructure group.
Investment Highlights: Top Infrastructure Companies
Ameron International (AMN): AMN is a pure infrastructure play with a product portfolio concentrated on
water transmission and distribution, along with fiberglass composite pipes used in oil and chemical
processing. With large-scale water infrastructures set to begin, AMN carries the potential to capture
funding from the stimulus bill.
Astec Industries (ASTE): Road construction projects will see additional funding from the ARRA, and we
view these projects as a potential catalyst for ASTE’s mobile road building equipment. The next
transportation bill is set for passage by the beginning of Q2/09 and there is speculation that SAFETY-LU
funding will expand, serving as a catalyst for long-term road spending.
American Water Works (AWK): AWK is the largest investor-owned water and wastewater utility in the
United States serving over 15 million people. With the passage of the ARRA and an infusion of
approximately $6 billion into the Clean Water and Drinking Water State Revolving Fund, AWK will have
access to cheaper, low interest capital for acquisitions of municipal water infrastructure.
Gorman-Rupp (GRC): With 25% of sales from municipal water markets, GRC deals in wastewater and
flood control. We view additional funding for Clean Water and Drinking Water State Revolving Funds
along with expanded Army Corps of Engineering funding as a potential catalyst for project funding. The
Army Corps New Orleans floodwater project carries the potential to add $150 million to sales beginning in
2010.
IDEX Corp. (IEX): Approximately 18% of IEX’s sales are derived from water and wastewater markets.
IDEX’s Fluid & Metering technologies provide pumps and electronic controls. Along with ARRA funding
for projects, potential EPA action to raise water quality standards may increase demand for IEX’s
PULSAR and PULSA metering pumps.
Insituform Technologies (INSU): INSU is a pioneer and market leader of cured-in-place pipe (CIPP)
technologies used in pipe rehabilitation. With the deteriorating state of sewer and drinking water pipes, we
view INSU as having a favorable long-term demand environment. Trenchless technologies for pipe
rehabilitation of aging water infrastructure are gaining traction and will likely see increased adoption over
the course of the next five years.
Kaydon (KDN): Approximately 20% of KDN’s net sales are for wind energy with backlogs and new orders
experiencing rapid growth. Wind energy capacity has ramped up with total orders for Q3/08 showing 34%
year-over-year growth. We view strong sales growth in wind orders even in the absence of stimulus
funding for projects. With Obama’s stated goal of doubling alternative energy production over the course
of the next few years, we see a favorable demand environment for wind products.
Kennametal (KMT): KMT is a high quality, well-managed industrial company that makes cutting tools and
other specialty tools used in many industrial segments. The company makes consumable products used
like razor blades in the metalworking and road building sectors. Approximately 6% of sales are road
rehabilitation tools and another 5-10% of sales for construction equipment. We believe that KMT will get a
direct positive impact in the road tools product group and construction equipment group. A secondary
positive impact may be likely from general industrial improvement that may happen as a result of the
Stimulus II plan.

MYR Group (MYRG): MYRG engineers and constructs electrical transmission and distribution lines and
power plants. As the stimulus bill will provide upgrades for electrical transmission lines and the next
energy bill will likely include funding for a Smart grid, which will require high voltage transmission lines, we
view federal spending as a catalyst for long-term share price appreciation. Despite the global recession,
we believe that sales, EBITDA and EPS will grow during 2009.
Northwest Pipe Co. (NWPX): The water pipe market should generate approximately $2.4 billion in sales
over the course of 2009-2011. NWPX should continue to grow over the course of the next three years
even in the absence of stimulus funding as the water infrastructure continues to remain in place well after
estimated project life. Raw material cost pass-through and a deflationary environment should provide
opportunities for margin expansion.
Pike Electric (PEC): PEC competes with MYRG and PWRR in power grid building, rehabilitation and
storm repair. We believe that the overhang on PEC may be its debt load and small market capitalization.
High single-digit operating margins suggest that PEC is leveraging the acquisition of Shaw Energy. Cash
flow looks reasonable at $34 million. Valuation appears attractive at 11.9x 2009 EPS and 0.9x EV/Sales.