Three Electrifying Stocks

The power grid has endured three decades of abuse. It took the biggest blackout in U.S. history, one that caused 50 million people to lose power on August 14, 2003, to mobilize the government and electrical utilities to begin dealing with the problem. Since then, Congress has passed legislation that provides incentives for utilities to invest more in power distribution and transmission.

It will take years and vast sums of money to renovate the grid. Nearly half of the system's 2.2 million miles was built between 1948 and 1970. That equipment has a half life of roughly 40 years. That means that much of the system has already begun to degrade.

And it means big bucks for the companies that will help repair the grid.

North American utilities spent about $9 billion in 2007 to upgrade the aging electric grid, says Sterne Agee analyst Michael Coleman. That represents a 20% increase from 2006 and is twice the level of spending in 2003. Coleman expects grid investment to grow to $10 billion by 2010.

U.S. laws passed in 2005 and 2007 are crucial to businesses that supply the equipment and know-how to build and maintain the power grid. The laws allowed more private capital to invest in power infrastructure, mandated new standards of reliability that force utilities to upgrade, and made it easier for state and local governments to acquire land for creating new electrical-transmission routes.

Moreover, power companies have the wherewithal to finance grid improvements. "Utilities right now have the lowest debt-to-capital ratio they have had in the past 30 years," says Russell Croft, co-manager of the Croft Value fund. "They are undercapitalized and can take on debt for new projects."

Croft has identified three stocks of companies that should benefit the most from upgraded spending on the power grid. They are General Cable, ABB and Quanta Services.

General Cable will supply many of the power lines. The Highland Heights, Ky., company makes aluminum, copper and fiber-optic wire and cable.

Sales to utilities represented one-third of the company's 2007 revenue of $4.6 billion. "As the North American market leader, General Cable is extremely well-positioned to grow volumes and achieve price increases in excess of cost in this market," Coleman says.

He says the company will be able to boost prices enough to offset the increasing cost of materials from rising metal prices. Roughly half of General Cable's sales come from contracts that contain provisions to raise prices as material costs rise.

The U.S. grid build-out is only one facet of General Cable's growth prospects, Coleman says. He expects demand from emerging markets, which are rapidly expanding their power grids and increasing exploration for oil and gas worldwide to fuel sales growth.

For example, General Cable recently received a $30 million award for its first offshore wind-farm project. Its products also are used in the construction of nuclear power plants, hydroelectric power generation and exploration for oil in the tar sands of Albert, Canada.