Strong demand stemming from the U.S. housing market rebound will benefit companies under the Zacks Building Products - Concrete & Aggregates industry. Also, a significant boost in infrastructural and public construction spending should continue to favor the industry.
Indeed, coronavirus-led restrictions, softness in non-residential construction activity, weather-related woes and higher labor are eating into margins of industry players. Nonetheless, prominent companies in the industry like Forterra, Inc. (FRTA), Eagle Materials Inc. (EXP), U.S. Concrete, Inc. (USCR), Summit Materials, Inc. (SUM) and Vulcan Materials Company (VMC) have been gaining from the positives.
The Zacks Building Products - Concrete & Aggregates industry consists of manufacturers, distributors and sellers of construction materials like aggregates, concrete, and other such items. The materials also include gypsum wallboard, recycled paperboard, concrete blocks, ready-mix concrete and oil and gas proppants.
4 Trends Shaping the Future of Heavy Construction Industry
Housing Sector Rebound & Funding to Aid Highway and Intermodal Projects: The housing market rebound and focus on enhancing the country’s infrastructure by upgrading highways, railroads, bridges and broadband are expected to be key catalysts for the industry. Solid housing market conditions in the United States backed by rising need for more work-at-home space and record-low mortgage rates are expected to be a major tailwind for industry participants.
The industry is also poised to benefit from the modest growth in public sector construction activity, mainly in transportation projects and contract work for highways as well as strong pricing. Currently, the Highway Trust Fund (HTF) is afloat on a one-year continuing resolution passed at the end of September. The U.S. House passed a legislation that injects $13.6 billion into HTF while extending the FAST Act by a year at current funding levels. The FAST — Fixing America’s Surface Transportation — Act, which was scheduled to expire on Oct 1, 2020, will now run through Oct 1, 2021.
Acquisitions & Focus on Operating Efficiency: The industry participants follow a well chalked-out acquisition plan to enhance domestic and international portfolios. Meanwhile, companies are increasingly focusing on reducing controllable costs and maximizing operating efficiency across business lines to generate higher earnings and cash flow.
Coronavirus-Related Woes & Weakness in Non-Residential: 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 and the impact these may have on project schedules.
In contrast to residential showing signs of a sharp recovery, non-residential construction indicators have remained weak through the first nine months of 2020, with commercial/industrial end markets being the primary reason for the continued weakness.
Shortage of Skilled Labors, Fluctuation in Input Prices & Weather Woes: The industry players are struggling with shortage of skilled laborers, rising wage costs and escalating material expenses. The companies use electricity, diesel fuel, liquid asphalt and other petroleum-based resources. Hence, supply-related woes and significant fluctuation in prices of these resources affect operating results. The businesses are also exposed to weather-related risks that affect production schedules and hence profitability. Excessive rainfall, flooding or severe drought jeopardize shipments and production. The first and fourth quarter are mostly affected by winter. Again, hurricanes in the Atlantic Ocean and Gulf Coast are the most active during these quarters. These impediments may continue to bump up costs and mar profits of industry participants.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Building Products - Concrete & Aggregates industry is a 12-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #111, which places it in the top 44% 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.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since August 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 6.4% and 9.5%, respectively, upward.
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 - Concrete & Aggregates 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 1.2% against the broader sector’s growth of 15.7%. Meanwhile, the S&P 500 has climbed 15.2%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing Building Products - Concrete & Aggregates stocks, the industry is currently trading at 24X versus the S&P 500’s 22.2X and the sector’s 18X.
Over the past five years, the industry has traded as high as 27.5X, as low as 12.9X and at the median of 20.4X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
5 Concrete & Aggregates Stocks to Keep a Close Eye On
Forterra, Inc.: Headquartered in Irving, TX-based Forterra is a manufacturer of concrete and clay building products. The company has been benefiting from its five improvement pillars: Health and Safety; Plant-Level Operational Discipline; Enhanced Commercial Capabilities; Working Capital Efficiency; and G&A effectiveness.
Importantly, this Zacks Rank #3 (Hold) company has seen 2.6% upward estimate revision for its 2020 earnings over the past 30 days. The stock has gained 150.6% in the past six months versus the industry’s 53.5% rally. Earnings for 2020 and 2021 are expected to grow 933.3% and 48.5%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: FRTA
Eagle Materials Inc.: This Dallas, TX-based company produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. Improved cement, concrete and aggregates sales volume and solid contributions from the recently-acquired Kosmos Cement Business have been aiding the company. Along with this, higher pricing as well as lower diesel costs added to the positives.
This Zacks Rank #3 company’s stock has gained 92.6% in the past six months. Its earnings estimates or fiscal 2021 have moved 0.8% up in the past 30 days. Earnings for fiscal 2021 and 2022 are expected to grow 11% and 8%, respectively.
Price and Consensus: EXP
U.S. Concrete, Inc.: Based in Euless, TX, this company produces and sells ready-mixed concrete, aggregates, and concrete-related products and services to the construction industry in the United States, the U.S. Virgin Islands, and Canada. Improved operating efficiencies, increased production volume at its Texas aggregates operations and profits from the Coram Materials acquisition are expected to drive growth. Also, actions taken under business contingency plans in the form of labor management and higher asset utilization and delivery efficiencies that include lower fuel costs are proving favorable.
The stock has gained 114.1% over the past six months. Although this Zacks Rank #3 company’s current-year earnings are expected to be affected by the pandemic, the expected earnings growth rate for 2021 is 24%. Meanwhile, its 2020 earnings estimates have moved 83% up in the past 60 days, reflecting optimism in the company’s earnings growth potential.
Price and Consensus: USCR
Summit Materials, Inc.: Denver, CO-based company produces and sells construction materials and related downstream products. The company’s mid-continental geographic footprint has been a boon as it has been relatively less affected by COVID-19. From an end-market perspective, strong residential construction activity backed by low interest rates and supply has been a breather.
The stock has gained 62.2% over the past six months. Although this Zacks Rank #3 company’s earnings for the current year are expected to decrease 9%, the same for 2021 are likely to grow 13.5%. Meanwhile, its 2020 earnings estimates have moved 11.7% north in the past 30 days.
Price and Consensus: SUM
Vulcan Materials Company: This Birmingham, AL-based company produces and supplies construction aggregates, asphalt mix as well as ready-mixed concrete. The company’s focus on four strategic initiatives — Commercial Excellence, Operational Excellence, Strategic Sourcing and Logistics Innovation — will enhance price growth and operating efficiencies. The company has also been generating higher earnings despite lower revenues on the back of prudent cost-control efforts and higher pricing in aggregates. Its focus on a systematic inorganic strategy for expansion added to the positives.
The stock has gained 37.9% over the past six months. Although this Zacks Rank #3 company’s earnings for the current year are expected to drop a meager 0.4%, the same for 2021 are likely to grow 5.8%. Meanwhile, its 2020 earnings estimates have moved 0.7% up in the past 30 days.
Price and Consensus: VMC
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