The Concrete and Aggregates industry in the construction sector, comprising manufacturer of aggregates, concrete, and other construction materials, has been witnessing robust demand for construction activity and elevated construction spending over the past few quarters. During the first six months of 2018, construction spending amounted to $619.9 billion, 5.1% above the $589.6 billion for the same period in 2017.
However, the Concrete and Aggregates industry has been under pressure owing to higher labor, freight and material costs as well as a constrained mortgage environment that are restricting companies from responding to the growing demand. According to an Associated Builders and Contractors’ (“ABC”) analysis of information provided by the U.S. Bureau of Labor Statistics, July construction material prices dropped 0.2% month over month. However, on a year-over-year basis, the price of construction materials increased by 9.5%.
Material costs are also impacted by steel and aluminum tariffs announced earlier this year. Again, the Trump administration’s tit-for-tat trade tariffs with major partners like China, Canada, Mexico and the European Union cannot be ignored. Recently, Trump doubled steel and aluminum tariffs on products from Turkey. Speculation is rife that tariffs could disrupt supply chains, undercut business investment and potentially wipe out the fiscal stimulus from a $1.5-trillion tax cut package.
Industry Lags in Terms of Shareholder Returns
Despite increased construction spending, concerns surrounding rising labor, freight and material costs have kept investors on the sidelines. The Zacks Building Products - Concrete and Aggregates industry, a 10-stock group within the broader Zacks Construction Sector, has underperformed the S&P 500 index as well as its own sector over the past year.
While stocks in this industry have declined 11.6%, the Zacks S&P 500 Composite has rallied 18.4% and the Zacks Construction Sector has risen 3.7%.
One-Year Price Performance
Building Products – Concrete & Aggregates Looks Expensive
Despite the underperformance of the industry over the past year, the industry's valuation is on the stretched side. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Concrete & Aggregates stocks.
The industry currently has a trailing 12-month P/E ratio of 24.86X, which is below the high and median levels of 29.61X and 25.7X, respectively, over the past year. While this shows there is significant upside potential, the industry looks expensive compared with the market at large.
The space has a P/E considerably higher than the trailing 12-month P/E ratio of 20.06X for the S&P 500, with the median level at 20.14X.
Price-to-Earnings Ratio (TTM)
Underperformance May Continue Due to Bleak Earnings Outlook
Though the construction space looks attractive this year given solid economic, consistent job growth and Trump’s vow to boost infrastructure spending, the Concrete & Aggregates industry will continue to be impacted by rising costs. Further, Trump’s steel and aluminum import tariffs have raised apprehensions.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the above ratio analysis shows that there is a solid value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a rebound in the near term.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences the performance of its stock.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
Looking at the aggregate estimate revisions, it appears that analysts are not upbeat about this group’s earnings potential.
Price and Consensus: Zacks Building Products – Concrete & Aggregates Industry
The consensus EPS estimate for the current fiscal has been revised down since Aug 31, 2017.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Cloudy Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Building Products – Concrete & Aggregates industry currently carries a Zacks Industry Rank #233, which places it in the bottom 9% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Building Products – Concrete & Aggregates Industry: Revenue Trends
Revenues for the industry have witnessed a sharp increase since December 2016.
A major boost in infrastructural and construction spending should continue to favor the industry. The industry is poised to gain from a significant amount of project awards across multiple segments comprising oil & gas, communications, transmission and power, and other infrastructural projects in the domestic as well as international markets.
Moreover, Trump’s long-awaited $1.5-trillion infrastructure plan will drive the industry’s growth over the long haul. However, higher labor, freight and material costs as well as a constrained mortgage environment are hurting the companies. Moreover, increasing competition is an added woe. So, it may not be a good idea to bet on this space right now. On that note, we have highlighted three stocks that investors should steer clear of.
Summit Materials, Inc. (SUM): Shares of this Denver, CO-based company has witnessed a sharp decline of 24% in the past three months. The Zacks Consensus Estimate for the current year has witnessed negative estimate revision of 33 cents in the last 30 days. It carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SUM
Eagle Materials Inc. (EXP): The stock of this Dallas, TX-based company has lost 12.2% in the past three months. The Zacks Consensus Estimate for the current year has witnessed negative estimate revision of 29 cents in the last 30 days. It carries a Zacks Rank #4 (Sell).
Price and Consensus: EXP
Vulcan Materials Company (VMC): This Birmingham, AL-based produces and supplier of construction aggregates, asphalt mix as well as ready-mixed concrete primarily has moved 12% south in the past three months. The Zacks Consensus Estimate for the current year has seen negative estimate revision of 11 cents in the last 30 days. It carries a Zacks Rank #4.
Price and Consensus: VMC
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