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Heavy Construction Outlook Upbeat on Solid Infrastructure Plan

Shrabana Mukherjee

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.

Let’s take a look at the industry’s three major themes:
 

  • Robust construction activity backed by increased construction spending in the United States boosted demand in the heavy construction space over the past few quarters. Public outlays of total U.S. construction spending amounted to $62.2 billion in the first three months of 2019, reflecting an increase of 9.2% year over year. Meanwhile, total construction spending during the period remains almost unchanged from the year-ago period. Importantly, Trump has agreed to pursue a $2-trillion infrastructure plan to upgrade the nation’s highways, railroads, bridges and broadband. This will likely call for more spending in the near future, in turn, boosting revenues and profits of construction companies.
     
  • The industry is poised to gain from a significant number of project awards across multiple segments, including communications, transmission and power, and infrastructural projects in domestic as well as international markets. 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 will show sizable growth. Moreover, construction work for communications is expected to gain momentum given huge investments to expand network. Also, the proliferation of smartphones should spur demand for network bandwidth and mobile broadband.
     
  • Rising labor and material costs have been hurting profit margins. Steel and aluminum tariffs announced in 2018 continue to impact material costs. Meanwhile, U.S.-China trade tensions raise concerns. Notably, on May 9, 2019, the Trump administration raised tariffs from the existing 10% to 25% on $200 billion in Chinese-made products. This prolonged trade war with China is gradually heating up and replicates increasingly bleak trade negotiations, thereby putting more challenges on the industry players’ margins.


Zacks Industry Rank Indicates Bullish Prospects

The Zacks Building Products - Heavy Construction industry is a 12-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #52, which places it in the top 20% 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.

The stocks in this industry have collectively lost 16.7% versus the broader sector’s decline of 7.8%. Meanwhile, the S&P 500 has gained 3.5%.

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 11.6X versus the S&P 500’s 16.6X and the sector’s 13.7X.

Over the past five years, the industry has traded as high as 18.3X, as low as 10.4X and at the median of 14.9X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500


 

Bottom Line

Indeed, rising costs, expected slowdown of the domestic economy and trade tensions are pressing concerns. That said, a major boost in infrastructural and construction spending should continue to favor the industry’s performance. Solid growth in end markets like communications, transmission and power, and other infrastructural projects should provide support.

Below we present four stocks from the Zacks Heavy Construction space that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Investors might also prefer holding another stock that have impressive growth prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock Corp. (GLDD) provides dredging services in the United States and internationally. The stock carries a Zacks Rank #1 and its EPS estimates for the current year have witnessed upward revision of 47.8% in the past 30 days.

Price and Consensus: GLDD



EMCOR Group, Inc. (EME): This Norwalk, CT-based electrical and mechanical construction, and facilities services provider in the United States currently sports a Zacks Rank #1. The consensus EPS estimate for this company has increased 3.8% to $5.45 for the current year, over the last 30 days.

Price and Consensus: EME



MasTec, Inc. (MTZ), one of the largest providers of construction services to the telecommunications industry in the United States, also sports a Zacks Rank #1. The consensus EPS estimate for this company has increased 3.7% to $4.52 for the current year, over the last 30 days.

Price and Consensus: MTZ


Primoris Services Corp. (PRIM): This is a Dallas, TX-based specialty contractor and infrastructure company. The consensus EPS estimate for this Zacks Rank #2 stock has increased 1.8% to $1.70 for 2019 over the past 30 days.

Price and Consensus: PRIM



North American Construction Group Ltd. (NOA): This Alberta, Canada-based heavy construction and mining services provider has an expected earnings growth rate of 85.7% for 2019.

Price and Consensus: NOA



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