The construction sector witnessed a dynamic 2017. Rising residential demand along with a rebounding U.S. economy eased political and economic challenges.
The Year So Far
The construction sector has demonstrated stability through 2017 and witnessed sustainable growth amid various challenges. It goes without saying that President Donald Trump was the biggest factor. Investors were expecting faster growth based on Trump’s assurance of significant tax cuts, higher infrastructure spending and lesser regulations.
Although the momentum slowed a bit later, the S&P 500 index topped the milestone of 2,500 for the first time on mid-September, surpassing the 266% rise during the 1949-56 run, per Bloomberg. Notably, the surge came in the aftermath of hurricanes Harvey & Irma, depicting strong complacency in the stock market.
Although public construction declined in 2017, it can get back into the positive territory with expansions in terminals and runways, airport construction, as well as with public education construction spending. On the other hand, residential spending increased 6.6% in the first 10 months of 2017, reinstating its stature, per the latest report from the U.S. Census Bureau.
So far, it has been a good 2017 for the housing market and the trend is expected to continue in 2018, courtesy of improving economy, modest wage growth, low unemployment levels, positive consumer confidence, a tight supply situation and escalating rent costs. Consumer Confidence, a key determinant of the economy’s health, improved significantly in November, reaching its highest level in 17 years. Again, there are signs of increased inclination of home purchases among millennials, a generation that had to some extent refrained from entering the market.
Despite the repeated hikes of the Federal Reserve’s interest rates, optimism surrounding the housing market remains largely unaffected. The U.S. economy expanded at an annual rate of 3.3% in the July-September quarter, marking the fastest pace since the third quarter of 2014 and a nice pickup from the second quarter's 3.1%. Notably, it is the first time since 2014 that the U.S. economy has witnessed growth of 3% or more for two straight quarters.
Will Supply Shortage & Labor Hurdles Restrain the Positive Momentum?
What is plaguing the industry of late is the inventory shortage prevailing in the U.S. real estate market and the upward pressure it is creating on prices in several parts of the country. Housing affordability fell in the third quarter of 2017, according to a National Association of Home Builders or NAHB survey. Meanwhile, labor shortage along with rising land and labor costs pose a threat to the companies’ margins.
Nonetheless, economists are of the opinion that the rebounding U.S. economy accompanied by low level of unemployment (4.1% in November) will keep the momentum alive for the sector as a whole. November figure was the lowest since December 2000. The United States has added jobs for 86 straight months, the longest streak.
All these positive factors have helped the construction sector to grow nearly 23.3% this year, higher than the broader market’s (S&P 500) rally of 19.3%. Notably, investing in the Construction sector might sound profitable right now, as it falls within the top 6% (1 out of 16 sectors) of the Zacks Industry Rank, which hints at further growth.
Keeping the positive momentum in mind, here are eight construction stocks that more than doubled the S&P 500 YTD and will continue to outperform in the coming months given that these have potentially superior weighting methodologies and a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Sterling Construction Company, Inc. STRL – Up 112.1%
Sterling along with its subsidiaries, operates as a heavy civil construction company in Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii, and other states in the United States. It carries a Zacks Rank #1 and has a long-term earnings growth rate of 11%. You can see the complete list of today’s Zacks #1 Rank stocks here.
In the last two years, the company has successfully turned around, and dramatically improved its balance sheet and overall financial health. Thus, the company is well positioned to generate substantial earnings growth in the future. Looking beyond 2017, the company expects to benefit from a steady stream of heavy civil project opportunities across its geographies as well as its residential business. The company’s earnings are expected to increase 211.3% for the current year and 119.1% for the next.
NVR, Inc. NVR – Up 102.4%
NVR is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings. NVR has delivered stellar performance so far this year, driven largely by its disciplined business model, focus on maximizing liquidity and minimizing risk. Potential housing revenues from backlog increased 15% to $3.42 billion.
Also, the number of new orders and the average sales price of new orders increased 11.4% and 0.1%, respectively, in the first nine months of 2017 from 2016 levels. The uptick can be attributed to favorable market conditions in 2017, which led to a higher sales absorption rate on a year-over-year basis.
This Zacks Rank #2 stock has a long-term (three-five years) expected EPS growth rate of 17%. The company’s 2017 earnings are expected to grow 42.5% and 16.8% for 2018.
D.R. Horton, Inc. DHI – Up 83%
Texas-based D.R. Horton is one of the leading national homebuilders. The company remains committed toward achieving continued double-digit annual growth in both revenues and pre-tax profits, while generating positive cash flow and improved returns. Further, its SG&A expenses are continuously decreasing due to cost control and better fixed-cost leverage.
The stock currently has a Zacks Rank #2 and the homebuilder’s current year’s earnings are expected to grow 17.4% and 14.6% for the next.
Boise Cascade Company BCC – Up 74.7%
The company is a wood products manufacturer and building materials distributor. The stock holds a Zacks Rank #1 and earnings for the current year are expected to grow 85.7% and 7.2% next year.
The company remains optimistic about improvement in demand for its products to continue as household formation rates and residential construction surges further.
United Rentals, Inc. URI – Up 55.1%
United Rentals is one of North America's largest equipment rental companies. The stock sports a Zacks Rank #1 and has surpassed earnings estimates consistently in the past seven quarters. United Rentals enjoys strong brand recognition, which enables it to draw customers and enhance customer loyalty. The company offers approximately 3,200 classes of rental equipment for rent on an hourly, daily, weekly or monthly basis.
Particularly, the company’s strategy calls for the implementation of Project XL, which is a set of eight specific work streams focused on driving profitable growth through revenue opportunities and generating incremental profitability through cost savings.
The company, with a solid ROE of 44.8%, is also expected to witness earnings growth of 22.1% for 2017 and 17.3% for 2018. The stock has a long-term (three-five years) expected EPS growth rate of 18.5%.
TRI Pointe Group, Inc. TPH – Up 51.5%
This Irvine, CA-based homebuilder is engaged in designing, construction and sale of single-family homes. This Zacks Rank #2 stock has an expected EPS growth rate of 11% for the next three-five years.
TRI Pointe remains well positioned to outperform its peers through better absorptions and deliveries from the higher-margin California market. The company’s EPS is expected to grow 12.5% for the current year and 14.9% for 2018.
Thor Industries Inc. THO – Up 51%
Thor Industries manufactures a wide range of recreational vehicles. It has a Zacks Rank #1 and the Zacks Industry Rank is in the top 1%.
The company, with a solid ROE of 27.8%, is also expected to witness earnings growth of 28.9% for the current year and 17.8% for the next.
Armstrong World Industries, Inc. AWI – Up 40.4%
Pennsylvania-based, Armstrong World is a leading global producer of ceiling systems for use in construction and renovation of commercial, institutional and residential buildings. The company has been selected to provide ceiling solutions for the Metropolitan Transportation Authority's East Side Access megaproject, the largest transportation construction project underway in the United States. Again, the Tectum acquisition will expand its leading portfolio of durable, sustainable and acoustical solutions.
Armstrong World has a Zacks Rank #2 and is expected to witness earnings growth of 21.8% for 2017 and 9.1% for 2018. It has a solid ROE of 46.6%.
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