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This Company Just Might Nickel and Dime You to Wealth

By Michael Brush
Exclusively for InvestorIdeas.com
November 02, 2006

They’re the kind of annoying, little day-to-day expenses that slowly erode your bank account: airport parking, road tolls, utility bills. You can’t do anything about them. But they sure do add up over time.

Wouldn’t it be nice to be on the other side of the equation? The problem is, many of these services are provided by the government so you can’t get a piece of the action unless you are Uncle Sam. In a growing trend, however, much of the necessary infrastructure around us is being privatized. And a lot of it will be falling into the hands of a New York-based company called Macquarie Infrastructure Co. Trust (MIC).

Macquarie already owns a hodgepodge of infrastructure businesses ranging from airport parking and an energy utility in Hawaii, to the service franchise for private aircraft at small airports and a building cooling service in Chicago.

Before we get into the details of Macquarie’s infrastructure portfolio, let’s take a quick look at what owning a chunk of these kinds of businesses means to you as an investor.

Many of these services are basic essentials that people can’t do without. They nickel and dime customers who have no choice but to shell out. Economists politely call it “inelastic demand.” For you as an investor, this means the company has steady, predictable cash flow.
Much of the revenue comes from long-term contracts with governments or other businesses. This means that inflation won’t eat away at revenue growth since inflation adjustments are built in to contracts.
Many of these businesses are regulated so pricing is based on “cost plus” equations or a “reasonable rate-of-return.” See above.
Most of these businesses involve long-lived, expensive assets that are costly to build and often require government approvals which can be hard to get. This means significant barriers to entry for competitors. Once in place these assets don’t cost too much to keep up – which again means they produce nice cash flow.
These services cannot be delivered over the Internet, they can’t be outsourced to India and there’s little risk some technology genius in California will come up with a “paradigm shifting” breakthrough that will eliminate the need for them. Again, this puts a nice wall around these businesses.

Steady cash flow for you

What does all of this mean to you as an investor? If you didn’t catch on by now, it means as a shareholder you have a piece of a steady, safe and predictable cash flow each year. And because Macquarie is set up as a trust, more of that money comes to you. Its income is not taxed at the federal level. Instead, you pay a 15% tax on the dividends that flow through to you.

For the six months ending June 30, 2006 Macquarie distributed $31.2 million out of its $192 million in revenue, or $1.15 per share. The company should pay a dividend this year of $2.10, for a dividend yield of 7%. Stifel, Nicolaus analyst Richard McCaffery thinks the dividend will increase to $2.25 next year. He has a $37 price target on the stock. It recently traded at $30.

Insiders recently confirmed the bull case for this stock. On October 30, insiders including chief executive Peter Stokes bought over $1.6 million worth of the stock for $29.50. They purchased over $1 million worth last May and June for prices between $27.59 and $29.

The business line up

Now here’s a quick look at Macquarie’s businesses.

Macquarie has been in three businesses for awhile:

Atlantic Aviation is an airport services business that has 19 “fixed base operators” in smaller airports around the country and one heliport in New York. These “FBOs” offer services like fueling, parking and hanger space. The FBOs serve “general aviation,” which means private aircraft, business planes, medivac and air freight. They don’t serve commercial air carriers or the military.
Macquarie Parking provides off-airport parking. It has over 40,000 parking spaces at 30 facilities near 20 major airports around the United States, including six of the ten largest passenger airports. The division operates under the names “PCA,” “Avistar” or “SunPark,” offering parking and shuttle bus services.
A “district energy business” operated through Thermal Chicago sells chilled water to about 100 customers in the downtown Chicago who use the water in building cooling systems. Another of these is called Northwind Aladdin, operates in Nevada.

In the past two quarters or so, Macquarie has purchased:

A gas production and distribution business in Hawaii called TGC, serving the islands of Oahu, Hawaii, Maui, Kauai, Molokai and Lanai.
A 50% ownership interest in IMTT Holdings, which owns a bulk liquid storage terminal business called International-Matex Tank Terminals. It has several terminals in the U.S. and Canada that store and handle petroleum products, chemicals and vegetable and animal oils.
Trajen Holdings, which owns and operates 23 FBOs.

Macquarie recently sold off an interest in Macquarie Communications Infrastructure Group, and a water utility and a toll road in England.

The right contacts

This frenetic buying and selling of infrastructure assets comes as no surprise. Macquarie Infrastructure Co. is managed by Macquarie Infrastructure Management which has links to the Macquarie Group, one of the leading global players in the purchase, sale, management and financing of infrastructure assets.

Given these ties, it’s no secret that Macquarie Infrastructure Co. plans to grow through acquisition in the coming years. “We believe it is often the case that infrastructure opportunities are not widely offered, well-understood or properly valued,” says the company in corporate filings. “The Macquarie Group has significant expertise in the execution of such acquisitions, which can be time-consuming and complex.”

The bottom line: These aren’t “exciting” businesses. But if you are looking for steady income from a stock that offers appreciation potential to boot, who cares. Macquarie has been weak recently, at least in part because it is going through a new round of financing. So I’d buy right here.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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