In Royce Premier Fund, Co-Lead Portfolio Manager Steven McBoyle, Assistant Portfolio Manager Andrew Palen, and I are always looking for what we call Quality Compounders—small-cap companies with unique business models that have high returns on capital and high reinvestment rates. In light of the market’s increased volatility, we think rock solid businesses with a domestic focus may potentially provide a cushion against the gyrations driven by geopolitical uncertainty.

Arcosa (NYSE: ACA), which supplies materials and structures for critical U.S. infrastructure, is a core holding and in our view a Quality Compounder. The stock fell roughly -22% following the company’s February earnings outlook, with Arcosa facing modest aggregates volume growth given persistent weakness in the U.S. housing market and flat Engineered Structures revenue due to a 25% decline in its non-core wind tower business.

Acrosa (NYSE: ACA)
12/31/25-3/20/26

Past performance is no guarantee of future results.

We think Arosa is receiving little credit for management’s stellar execution transforming the company by exiting low return, more cyclical businesses—which includes the recently announced sale of its barge manufacturing division—and reinvesting the proceeds and free cash flow to further scale its higher growth, higher return on invested capital (ROIC) Construction Products and Engineered Structures segments, which now generate almost all of the company’s operating cash flow.

Following the barge divestiture, about 60% of Arcosa’s EBITDA (earnings before interest, taxes, depreciation & amortization) will come from Construction Products, which generates the majority of sales from natural and recycled aggregates such as sand, gravel, and crushed stone—the essential building blocks for roads, bridges, and buildings. Cement and asphalt cannot be made without aggregates, and there are no substitutes. Forty-five percent of 2025 sales came from infrastructure, 25% from non-residential construction, and 20% from residential construction (with the remainder for specialty markets). The quarries where Arcosa extracts and processes aggregates are essentially local oligopolies due to the high cost of transporting these heavy, low dollar-per-ton value materials beyond a 50-mile radius. Permitting challenges, environmental regulations, and capital intensity are additional barriers to entry that support mid-single digit annual price increases. While not immune to severe construction recessions, the essential nature of both aggregates and infrastructure repair reduces consumption volatility.

Attracted to these favorable economics, Arcosa has expanded its network of aggregates reserves and quarries via organic investments and the acquisition of seven companies for $2.5 billion since 2018. The valuation multiples paid have been reasonable in our estimation and were enhanced by operational improvements once the companies were under Arcosa’s management. The company has intentionally scaled its operations in the Southwest (35% of revenue comes from Texas) and Southeast, markets with favorable long-term population migration trends and healthy infrastructure funding. In addition, Arcosa’s 2024 acquisition of Stavola gave it a solid foothold in the New Jersey/New York region (20% of revenue), the largest metropolitan statistical area in the U.S. that also has a high level of less cyclical, infrastructure repair and replacement business.

Arcosa’s favorable footprint, the pricing power inherent in the aggregates business, and volume tailwinds such as infrastructure spending (50% of 2021’s Infrastructure Bill remain to be spent), reshoring, and data center buildouts should all enable its Construction Products segment to deliver mid-to-high single digit organic growth over the long term with high incremental margins. Acquisitions that bolster Arcosa’s regional density or provide a gateway into new markets will continue to be the prime focus of future reinvestment.

The company’s Engineered Structures segment manufactures steel and concrete structures, including utility structures for electricity transmission and distribution, wind towers, traffic and lighting poles, and telecom lattices and related towers. Utilities comprise about two-thirds of this segment’s revenues, 70% of which is for large transmission projects. Arcosa is one of a handful of scaled, national providers of these critical, complex structures. A healthy backlog and continued strong order growth reflect Arcosa’s long-term relationships and proven track record with utility customers. Secular tailwinds include grid hardening and the expansion of transmission infrastructure in the face of rising electricity consumption (e.g., AI data centers, EVs, and reshoring), along with the integration of renewable energy sources and densification of next generation telecom networks.

Current market forecasts call for a shortfall in utility structure capacity in 2027 and rising demand through at least 2030. Arcosa is addressing its capacity needs by using the weakness in its non-core wind tower business to bring an idled wind facility back online to produce utility structures beginning in the second half of this year. It also recently announced it will be converting another facility for utility production in 2028 after it fulfills its wind tower backlog.

We think these conversions are both ROIC-accretive and a capital-efficient way to expand capacity, while right-sizing its wind tower facilities down to two. Arcosa’s utility structures business should continue to grow at a double-digit annual pace for the next several years, while its product mix and volume leverage should enable annual margin improvement for the Engineered Structures segment after 2026.

Despite Arcosa approaching the late innings of its transformation phase, where it has refocused on its durable moat businesses that offer faster, less cyclical growth and higher ROIC, the company now trades several multiple points below those paid for similar businesses in private market transactions and of public peers. With its dominant positions in businesses with favorable secular demand tailwinds, we think Arcosa has a solid runway for attractive long-term organic growth and margin expansion, as well as ample high ROIC reinvestment opportunities to pursue when it resumes acquisitions in the aggregates space.

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