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3 Under the Radar Construction Stocks to Buy Before an Infrastructure Deal is Announced

·6 min read

President Biden’s infrastructure bill proposal to revive the country’s infrastructure should bolster the construction industry's prospects. Although a failed Senate test vote recently dealt the bill a blow, Senators’ plans to advance the bill’s bipartisan framework in the coming days bodes well for construction stocks. Thus, we believe investing in the stock of relatively unsung construction companies Quanta Services (PWR), EMCOR Group (EME), and Granite Construction (GVA) could be highly rewarding. Let’s discuss.

An economic shutdown and supply chain disruptions due to the COVID-19 pandemic battered the construction business last year. However, President Biden’s $1.2 trillion bipartisan infrastructure plan, which was announced earlier this year, to rebuild the nation’s roads, bridges, and other infrastructure should give the construction industry a solid foundation for growth.

Although the proposed infrastructure framework suffered a setback in a recent Senate test vote, the 22 Democratic and GOP senators drawing up the plan said they hope to advance the bill in the coming days. Since this infrastructure plan is at the core of Biden's "Build Back Better" program, the benefits would be even broader for construction materials and heavy machinery companies. Furthermore, the global construction market is expected to reach $12,526.4 billion in 2021, registering a 9% CAGR.

Given this backdrop, we believe under-the-radar construction stocks Quanta Services, Inc. (PWR), EMCOR Group, Inc. (EME), and Granite Construction Incorporated (GVA) could generate solid returns in the coming months.

Click here to check out our Infrastructure Sector Report for 2021

Quanta Services, Inc. (PWR)

PWR, in Houston, Tex., provides specialty contracting services, primarily to the electric power and oil and gas industries in the United States, Canada, Australia, and other international markets. The company operates through two segments: Electric Power Infrastructure Services, which provide network solutions to customers in the electric power industry, and Underground Utility and Infrastructure Solutions, which provide network solutions to customers involved in the development and transportation of natural gas, oil, and other pipeline products.

Last month, LUMA Energy, LLC, a joint venture by PWR and Canadian Utilities Limited, began operations and maintenance of Puerto Rico's electric power transmission and distribution (T&D) system under a supplemental terms agreement. They aim to build a more dependable and resilient electricity infrastructure that is expected to provide long-term social and economic benefits to the people of Puerto Rico.

During the first quarter, ended March 31, 2021, PWR’s gross profit increased 12.3% year-over-year to $372.89 million. The company’s operating income increased 40.9% year-over-year to $113.73 million over this period. Its net income increased 132% from its year-ago value to $89.76 million, while its EPS grew 138.5% from the prior-year quarter to $0.62.

A $4.42 consensus EPS estimate for the current year represents a 15.7% improvement year-over-year. Furthermore, PWR has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. The $12.21 billion consensus revenue estimate for the current year represents a 9% increase from the same period last year. The stock has gained 114.5% over the past year and 45% over the past nine months.

PWR's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

PWR has also rated a B for Growth, Momentum, and Sentiment. Within the B-rated Industrial - Services industry, it is ranked #18 of 84 stocks.

To see additional POWR Ratings for Quality, Stability, and Value for PWR, click here.

EMCOR Group, Inc. (EME)

EME is a leader in mechanical and electrical construction, industrial and energy infrastructure, and building services. A Norwalk, Conn.-based provider of critical infrastructure systems, the company offers its services to diverse businesses, organizations, and governments.

In April, EME completed the acquisition of Dallas Mechanical Group, LLC, a leading mechanical construction and maintenance services provider. Through this acquisition, the company aims to provide a greater array of innovative and value-added services to its clients.

EME's operating income increased 10.4% year-over-year to $117 million in the first quarter ended March 31, 2021. Its gross profit surged 2.4% year-over-year to $341.07 million. The company's net income increased 12% from its year-ago value to $84.77 million over this period. Its EPS increased 14.1% year-over-year to $1.54.

EME is expected to generate 6.7% revenue growth for the current year. Its EPS is estimated to increase 4.7% year-over-year to $6.7 in 2021. Over the past year, EME's stock has gained 88.7%. Furthermore, it has gained 33.1% year-to-date.

EME’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock also has a B grade for Growth, Stability, and Sentiment. In the Industrial - Services industry, it is ranked #2 of 84 stocks.

In total, we rate EME on eight different levels. Beyond what we've stated above, we have also given EME grades for Value, Momentum, and Quality. Get all the EME ratings here.

Granite Construction Incorporated (GVA)

GVA is a construction materials manufacturer and infrastructure contractor in the United States. Transportation, Water, Specialty, and Materials are the business segments through which the company operates. GVA is based in Watsonville, Calif.

This month, the Washington State Department of Transportation granted GVA a $28 million contract to build the 148th Avenue NE Interchange Access Ramp in downtown Redmond, Wash. Also this month, GVA was granted an $18 million contract by Salt Lake City in Utah for its 300 West Reconstruction project. These projects should help the company boost its revenue significantly and drive business growth.

During the first quarter, ended March 31, 2021, GVA's revenue increased 5.3% year-over-year to $669.91 million. The company’s gross profit increased 166.1% year-over-year to $63.32 million. It reported $16.89 million in adjusted EBITDA, compared to a negative adjusted EBITDA of $18.35 million in the prior-year quarter. Its cash and cash equivalents increased 83.6% year-over-year to $454.44 million over this period.

The company's EPS is expected to grow 123.9% year-over-year to $0.76 in the current year. Analysts expect GVA’s revenue to increase 4.1% to $3.71 billion in its fiscal year 2021. GVA's stock has gained 102.8% over the past year and 40.7% year-to-date.

It is no surprise that GVA has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has a B grade for Growth, Value, and Momentum. In the Industrial - Services industry, it is ranked #31 of 84 stocks.

In addition to the POWR Ratings grades we have just highlighted, one can see the GVA rating for Quality, Stability, and Sentiment here.

Click here to check out our Infrastructure Sector Report for 2021

PWR shares were trading at $87.05 per share on Wednesday morning, down $1.04 (-1.18%). Year-to-date, PWR has gained 21.03%, versus a 18.17% rise in the benchmark S&P 500 index during the same period.


About the Author: Pragya Pandey


Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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