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It’s still August, yet Starbucks has already returned to its fall menu. That means it’s ‘PSL’ season as the Pumpkin Spice Latte is back to celebrate its 20th anniversary ☕

The drink is wildly popular — Starbucks will sell about 20 million of them this fall. Its executives know what appeals to consumers: Cold beverages, foam, and sugar. Instagramability helps, too.

But today, we’ll briefly discuss something you probably won’t see on Instagram: the incredibly lucrative market of American roads.

All this, and more, in just 4 minutes to read.

— Matthew

QUOTE OF THE DAY

“Fear, greed, and hope have destroyed more portfolio value than any recession or depression we have ever been through.”

— Jim O’Shaughnessy

WHAT ELSE WE’RE INTO

📺 WATCH: How China became the world’s top car exporter

🎧 LISTEN: Will there ever be another Warren Buffett?

📖 READ: Intelligent vs. smart (Morgan Housel’s latest)

THE LUCRATIVE ROADS MARKET

Golden age

Some of the most profitable American companies operate in what many Americans deem as boring markets. From insurance and oil to the roads we drive on, mundane industries can boast enormous profits.

Take CRH, the largest road paver in America, which made $32.7 billion last year. It operates in a cyclical industry, as government spending on infrastructure like roads fluctuates.

But one thing remains constant through generations: Americans love to drive — roughly 3 trillion miles annually. As art critic Dave Hickey once said: “Beauty is and always will be blue skies and open highway.”

And vehicles have gotten bigger and bigger — cars, vans, and trucks are heavier than ever, putting enormous pressure on roads to hold up. Sometimes, it feels like roads are always under construction, and there’s some truth to that. A few companies stand to benefit.

The U.S. will invest $1.2 trillion in roads over the next few years, a 50% increase via the Infrastructure Investment and Jobs Act signed in November 2021.

CRH’s chief operating officer told CNBC that “it’s the golden age of infrastructure.”

Billions in asphalt

There are nearly three million miles of roads in the U.S., and almost all of it needs to be replaced at some point.

With a market cap of about $41 billion, CRH is flush with cash from its biggest, favorite client: the U.S. government, which spends more than $600 per person yearly on highways.

For the U.S. government, CRH produces aggregates, the rocks used to make concrete, cement, asphalt, and other construction products. It’s a good, steady business in a relatively stable market, the kind of thing that likely won’t change anytime soon.

Even if everyone drives an electric vehicle in 20 years, we still need roads, and the U.S. government has shown it will continue to spend on infrastructure in bull markets and recessions.

“American roads are good not because America is rich, but America is rich because American roads are good,” former President John F. Kennedy once said.

Paving the way to profit

Why is the asphalt paving industry so profitable? Here are five key reasons:

• Steady demand: Asphalt demand has risen steadily amid urbanization, population growth, and general wear and tear. In many ways, roadways are the lifeline of our economy. They help us commute to work, travel for leisure, and transport goods.
• Limited competition and barriers to entry: The barriers to entry in asphalt paving are high. You need specialized, expensive equipment, skilled labor, and expertise in paving techniques, all limiting competition and allowing established companies to maintain higher pricing power.
• Government contracts: State and local agencies invest heavily in roads yearly to improve transportation and make their area more appealing. Often, they’re large-scale projects under profitable, steady contracts.
• Lifecycle: Asphalt surfaces degrade due to weather, traffic, and general wear and tear. Replacing and amplifying American roads is a continuous project — even if we don’t build any new roads, there’s always an existing road that needs repaving.
• Economies of scale: Paving companies like CRH have the equipment and skilled workforce, so as volume increases, the cost per unit of work decreases dramatically. Economies of scale at this level can substantially increase profit margins.

CRH emphasizes vertical integration, meaning it controls various supply chain stages, from raw materials to the finished product. This leads to cost savings and efficiency. CRH also has a history of acquisitions to help it expand in new markets, access new technologies, and become more sustainable in asphalt production, reducing environmental impact.

To that end, companies are trying to make more eco-friendly roads with “warm mix asphalt” made at lower temperatures with lower carbon emissions. There’s also recycled asphalt pavement, but it degrades faster because it’s older.

Still, almost everything boils down to cost, and recycled materials are less expensive. Inflation has recently driven highway construction costs by nearly 30%, so recycled pavement can lower project costs. Today, about 25% of CRH pavement — asphalt pulled up off the road and ground up — is made of recycled materials.

Could it one day become 100%?

Dive deeper

For more, here’s a cool video on how an asphalt plant works.