Pittsburgh: Buy, Sell or Hold?
We’ve asked a group of the region’s leading financial experts to give their opinion on the following question: “If the Pittsburgh region were an investable security, what changes, if any, would you want to see before you advised your clients to invest?” Their answers follow.
Linda Duessel, Federated Investors: Pittsburgh already is a “buy.” It’s a midcap stock with attractive fundamentals that’s growing and on the verge of breaking out. With my beloved alumni of CMU and the Robotics Institute, the city has attracted the likes of Uber, Google, Apple and Facebook. Everywhere I travel, I’m always hearing and reading about how Pittsburgh has the driverless car, how it’s evolving and changing, how it’s a city for the future. Just look at the lists. It’s one of the best places to live for young people and first-time homebuyers, one of the best places for foodies, one of the best places in the world to visit, one of the most hipster-friendly cities, etc., etc. Pittsburgh is being discovered; you ought to buy now.
James Armstrong, Henry H. Armstrong Associates: Much as we enjoy being based in Pittsburgh, the city does not presently meet our criteria for investment. To make an investment, we generally need to see growing profits with a long runway and high probability of future profits. We also need to see a strong balance sheet, with a debt level that is easily serviced. And we need to see strong and durable competitive advantage. Pittsburgh is still shrinking in population and does not yet have a clear source of growing economic strength. Pittsburgh’s debt level and its future required infrastructure spending are by no means easily serviced by its present population and tax revenue. And from a competitive perspective, other cities of comparable size offer better circumstances to companies that can provide economic growth. We see signs of hope for Pittsburgh’s future, but at present, we would pass on the investment.
John Augustine, Huntington Bank: Pittsburgh is quickly becoming like a large U.S. conglomerate. The economic base of the region now features the growing diversification of medical technology, energy, finance, autonomous systems, life sciences and advanced manufacturing. Our employment base is growing, our assets (housing) and incomes are rising, and revenues are increasing (regional GDP). Those are all attributes of a successful company. What do we need to focus on? Education, infrastructure and our public-sector balance sheet. Improving these three will add to the success of the region for the next generation of Pittsburghers!
Thomas L. Wentling Jr., Wentling Tarquinio Loughney Wealth Consulting Group, UBS Financial Services Inc.: As a consequence of the legacy of the “Robber Baron” era, from which we have all benefited mightily (our per capita cultural assets, for instance, have to be near the top of the heap), we also inherited a proletariat versus bourgeoisie mindset, perhaps understandable initially, but that just won’t die out and must change if we are to succeed. There are so many positive developments here, from technology spun out of our magnificent universities and health care systems, to the rebirth of an oil and gas sector once given up for dead. All the pieces are falling into place for Pittsburgh to put itself back on the map. The rebirth of entrepreneurial activity, high and low tech, has enormous potential for investors. Just do it!
Joseph Scarpo, Private Wealth Advisors: The municipal bond market, where states and local municipalities raise money for public projects, has historically been a sound investment. On January 30, 2019, Moody’s Investors Service assigned an A1 rating to the City of Pittsburgh, reflecting our medical technology and robotics prowess. The A1 rating also incorporates a notably high pension liability, considerable debt burden, and substantial capital needs of the City’s water and sewer utility. Moody’s rating tells investors that Pittsburgh is a reasonably safe bet. PWA would like to witness progress on infrastructure issues, a reduction in the pension liability, and a broadening of the corporate tax base. An increase in skilled labor jobs, along with a reduction in individual and corporate taxes, would enhance our view of the Pittsburgh region as an investable security.
Alison F. Wertz, Bill Few Associates: As a 2009 G20 volunteer, I was witness to Pittsburgh’s successful IPO. Over 3,000 journalists from around the world convened on our city with hopes of reporting acts of anarchy and destruction. When chaos never materialized, the reporters were forced to find newsworthy material. The result was roughly 7,000 stories in publications around the world boasting about Pittsburgh’s economic, cultural and environmental revitalization. Ten years later I no longer view our city as a risky and unpredictable IPO but rather a mature, diverse long-term investment. The greatest risk is to not be able to provide an educated work force to support the continued growth of our region. Of course, that can be accomplished by bringing talent to the region, but the better long-term strategy is to develop that talent from our local youth.
Elizabeth Genter, Schenley Capital: We think of Pittsburgh as a convertible bond, so that the investor can hold the bond until the right time for the investor to convert it into stock. Until recently, the Pittsburgh region had been in a slow/no growth mode as illustrated by an older population, slow real estate climate, little new building activity and the tendency of young graduates to leave for other cities. However, the Pittsburgh region is now experiencing the birth—or rebirth—of many exciting new and old tech companies, a boom in new hotels, apartment complexes and restaurants in addition to which young graduates find Pittsburgh both livable and inexpensive. Our investor should have now converted into Pittsburgh Stock. Areas of improvement we would like to see include an increase in direct flights to neighboring cities, improved mass transit and a better business climate to attract more businesses to relocate to Pittsburgh.
Erik Kimbrough, PNC Wealth Management: Employment was flat in the Pittsburgh metropolitan area from 2012 to 2016, in large part because of lower energy prices, but job growth has resumed over the past couple of years as energy prices have stabilized. I would like to see evidence that Pittsburgh can sustain job growth during periods of falling energy prices, a sign that the metropolitan area is not dependent on just one industry for solid growth. In addition, population in the seven-county metropolitan area has fallen for the last five years; population must increase over the longer run if the Pittsburgh region is to enjoy long-lasting success.
Peter F. Mathieson, Fairview Capital Investment Management: Given our philosophy of investing client money only in securities that are competitively advantaged with superior balance sheets and ample free cash flow, it is difficult for us to imagine ever professionally investing in a politically driven region. However, given the hypothetical, we do believe that Pittsburgh is in an excellent position to continue its place as one of the most livable regions in our great country. For instance, the positive changes occurring on the North Side where the community (residents, political leaders, corporations, schools, police, hospitals and foundations) are all coming together focused on the collective impact of improving the safety, health, education, employment and sense of place for all of its neighborhoods and residents is resulting in dramatic systemic improvements across all areas. Once this movement is copied and instituted throughout our entire region, all of us will truly experience amazing returns!
Kim Craig, First National Bank: We currently advise our clients to invest in the Pittsburgh region. The region remains focused on economic growth through the development of collaborative agendas of strategic priorities assembled from local leadership in the public, private and academic sectors. Pittsburgh is fortunate to have access to vast financial, intellectual and political capital which can be effectively utilized and leveraged for sustainable economic growth. These resources enable the region to attract emerging new industries to further diversify the economic base. Infrastructure improvements without too much inconvenience would simply be icing on the cake.
Robert Y. Kopf, Jr., Smithfield Trust Company: I love Pittsburgh and the Pittsburgh region. Yet, if the City of Pittsburgh and the region were a stock, I would short it. The reason is simple: we have too much debt and unfunded pension and infrastructure liabilities. While Pittsburgh has been removed from Act 47 municipal financial distressed status, it still has a staggering debt of $1.9 billion, arising mostly from unfunded retirement obligations. On top of this, credible estimates indicate that the region needs to spend $5 billion to repair and overhaul an antiquated water and sewer system which is more than 100 years old. The politicians who created and sustained this fiscal nightmare should be tarred and feathered.
Win Smathers, Shorebridge Wealth Management: I think Pittsburgh is an attractive value “stock” poised for accelerating growth. Pittsburgh has world-class universities and health care systems attracting top companies and talent. It has a relatively low cost of living and good schools. Gentrification is revitalizing neighborhoods all across the city, raising the value of real estate and making urban living desirable again for empty nesters and millennials alike. But there are issues to address. The airport is terribly underutilized. Significant investment is needed to replace crumbling infrastructure. Public transportation requires a total rethink. And we need good leadership, planning, policies and execution from our elected officials. We learned from the Amazon HQ2 search process that Pittsburgh is an up- and-coming place to do business and live. With a little patience, Pittsburgh should be a solid, long-term investment.
David B. Ellwood, Wesbanco: Infrastructure improvements should be a first priority including roads and bridges, water and sewer and public transportation. The educational and medical base provides significant economic benefit but can also be a strain on public resources. The improvements over the past decade cannot be ignored and should draw interested investors to the region as the City’s profile continues to evolve.
Jack Kraus, Allegheny Financial: Pittsburgh is a diversified economy with a slight concentration in health care-related services, which matches the higher than average median age of 43.1 years versus 37.9 nationally. Pittsburgh has a lower poverty rate of 10.8 percent versus 14 percent nationwide. Median household income is also slightly below average, and Pittsburgh has continued to see population loss, even though it is at a much lower rate. If Pittsburgh were a security, it would be a mid-cap value stock. The growth potential is not as high as other cities, but Pittsburgh is not a deep value stock. It would be worthy as being a part of a client’s portfolio.
Jeff Muhlenkamp, Muhlenkamp & Company: I’d want management to be interested in return on capital and efficiency. I’d want their pay packages to be structured such that higher returns on capital employed and increased efficiency were rewarded.
Gregory Curtis, Greycourt & Co.: The only change I would make is to encourage migration of young workers into the region, since we have an acute labor shortage, especially for entry-level jobs. Other than that, relative to other cities, and especially relative to older industrial cities, Pittsburgh is a screaming buy.
Henry S. Beukema III, Guyasuta Investment Advisors: If Pittsburgh were an investable equity security, investors would have several positive factors to consider. Our region’s education and medical institutions (“meds and eds”) are best in class. In addition, Pittsburgh’s “meds and eds” give our region a national and international reputation that helps attract corporations and generate job growth. Critical to the region’s long-term economic vitality is continuing to improve our education system and to invest in our infrastructure, including roads, bridges and transportation. This may require higher taxes. While citizens and investors do not want to pay higher taxes, investments in the education system and infrastructure generate long-term value for the region.
Brian Sommers, HBKS Wealth Advisors: There are many companies in the Pittsburgh region that are at the top of their industries, especially in the health care, technology and energy industries. Western Pennsylvania has made great progress in diversifying our economy over the past 20 years, yet more work needs to be done to improve both the level of job growth and the source of jobs. It would be beneficial if more manufacturing activity were located in the Pittsburgh region, and there is the potential for this to occur when the ethane cracker plant opens in Beaver County. Manufacturing jobs may see a boost if firms relocate manufacturing centers to the region in order to be closer to the source of the ethylene they use in the production of various plastic, rubber and pharmaceutical products.