Solid growth in end markets like communications, transmission and power, and other infrastructural projects will benefit companies in the Zacks Building Products - Heavy Construction industry. However, coronavirus-induced disruptions and project delays in the near term, a tight labor market, slowing global growth and rising costs are pressing concerns.
Dycom Industries Inc. (DY), Tutor Perini Corporation (TPC), Great Lakes Dredge & Dock Corp. (GLDD) and Sterling Construction Company, Inc. (STRL) are set to benefit from the solid market prospects.
The Zacks Building Products - Heavy Construction industry consists of mechanical and electrical construction, industrial and energy infrastructure, and building service providers. The companies serve commercial, industrial, utility and institutional clients.
The industry players are engaged in engineering, construction and maintenance of communications infrastructure, oil and natural gas pipelines, and processing facilities for the energy and utilities industries. These firms are also engaged in dredging services in the United States and internationally.
3 Trends Shaping the Future of Heavy Construction Industry
Strong Prospects in Telecommunication: Ramp-up in projects related to 5G has been a silver lining for the industry players. Increased demand from telecom customers for wireline networks, wireless/wireline converged networks and wireless networks using 5G technologies has been benefiting the industry players. Construction work for communications is expected to ramp up on huge investments in network expansion. The proliferation of smartphones should drive demand for network bandwidth and mobile broadband.
Also, Trump’s impetus to upgrade the nation’s highways, railroads, bridges and broadband calls for more spending in the near future, which will boost revenues and profits of construction companies. The industry is poised to gain from a significant number of project awards across multiple segments, including communications, health care, transmission and power, and infrastructural projects in domestic as well as international markets.
Solid Inorganic Moves & Renewable Business Prospects: Acquisitions have been the companies’ preferred mode of solidifying the product portfolio and leveraging new business opportunities. Again, owing to increased renewable project activity, and expansion of services in biomass and other smaller production facilities, the power generation and industrial construction market is poised to see sizable growth.
Coronavirus-Related Woes: The coronavirus pandemic-related disruptions will weigh on the companies’ near-term results. The biggest headwinds for the industry players are centered around governmental permitting, crew social-distancing mitigation and the impact these may have on project schedules. Also, slowing global growth, tight labor market and trade war-induced rise in raw material costs pose significant challenges. Meanwhile, businesses of the industry players are susceptible to the cyclical nature of the markets in which clients operate and are dependent on the timing and funding of new awards. Hence, volatility in credits and operating risks associated with economic down-cycles are pressing concerns.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Heavy Construction industry is a 22-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #124, which places it in the top 49% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks Building Products - Heavy Construction industry has lagged the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 16.8% versus the broader sector’s growth of 21.8%. Meanwhile, the S&P 500 has risen 17.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing heavy construction stocks, the industry is currently trading at 10.8X versus the S&P 500’s 22.6X and the sector’s 18.4X.
Over the past five years, the industry has traded as high as 18.3X, as low as 7.5X and at the median of 14.4X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 Heavy Construction Stocks to Keep a Close Eye On
Dycom Industries Inc.: Based in North America, Dycom is a specialty contracting firm operating in the telecom industry. Increased demand for network bandwidth and mobile broadband along with extensive deployment of 1-gigabit wireline networks are likely to benefit the company going forward. Moreover, this Zacks Rank #1 (Strong Buy) company’s strong financial position coupled with diligent operational execution allows it to undertake strategic initiatives for expanding market share.
Importantly, Dycom has seen 6.4% upward estimate revisions for its fiscal 2021 earnings over the past 60 days. The stock has gained 67.6% in the past three months versus the industry’s 24.9% rally. Earnings for fiscal 2021 are expected to grow 24.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DY
Sterling Construction Company, Inc.: Headquartered in The Woodlands, TX, this company is engaged in the heavy civil construction, specialty services, and residential construction activities. This Zacks Rank #3 (Hold) company is currently reaping the benefits of its transformed business portfolio and its overall project mix toward higher value add, lower risk, and more profitable work. Its Specialty Services segment has been bolstered with the recent buyout of Plateau. Residential segment rebounded from the pandemic-related woes of the first quarter and is gaining strength from a faster-than-anticipated recovery of the Texas housing market and its expansion into the Houston market. Meanwhile, the company’s Heavy Civil business has been executing well on substantial heavy highway work.
Sterling stock has gained 64.7% in the past three months. Earnings for 2020 are expected to grow 66.8%.
Price and Consensus: STRL
Tutor Perini Corporation: Headquartered in Sylmar, CA, this company provides diversified general contracting, construction management and design-build services to private clients and public agencies worldwide. Prospects for this company appear bright given several large Civil segment projects biddings in the second half of 2020. The company has been benefiting from increased activities on large infrastructure projects.
The stock has gained 22% over the past three months. This Zacks Rank #3 company has an expected earnings growth rate for of 188.6% for 2020.
Price and Consensus: TPC
Great Lakes Dredge & Dock Corp.: This company provides dredging services in the United States and internationally. The company is the largest provider of dredging services in the United States. Strong domestic dredging operations, high equipment utilization, solid project execution and savings from restructuring are expected to drive growth for the company. We believe the company’s strong bidding ability and project execution will boost its performance in 2020 and 2021.
The stock carries a Zacks Rank #3 and has an expected earnings growth rate of 23.3% for 2020.
Price and Consensus: GLDD
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