Zacks Industry Outlook Highlights Quanta Services, AECOM, KBR, Altair Engineering and Fluor
For Immediate Release
Chicago, IL – March 9, 2022 – Today, Zacks Equity Research discusses Quanta Services Inc. PWR, AECOM ACM, KBR, Inc. KBR, Altair Engineering Inc. ALTR and Fluor Corp. FLR.
Industry: Engineering - R&D Services
Link: https://www.zacks.com/commentary/1878909/5-engineering-rd-services-stocks-to-watch-amid-supply-chain-woes
Supply-chain constraints and input cost headwinds are taking a toll on the Zacks Engineering – R&D Services industry. Labor constraints are making things worse. Nonetheless, the U.S. administration’s major focus on infrastructural enhancement has been creating the need for advanced construction and engineering solutions.
Also, the companies’ shift toward digital transformation, mergers & acquisitions as well as operational efficiencies should lend support to the industry. Increasing investments in the decarbonization of energy efficiency and energy transition projects also appear to be growth drivers. Consistent focus on enhancing the infrastructure of the country’s defense, healthcare, communication, and renewable energy is encouraging for prominent industry players like Quanta Services Inc., AECOM, KBR, Inc., Altair Engineering Inc. and Fluor Corp.
Industry Description
The Zacks Engineering – R&D Services industry primarily consists of engineering and infrastructure service providers. The companies basically provide construction, technical, engineering, and professional services to a number of industries worldwide, including oil and gas, chemical and petrochemicals, transportation, mining and metals, power, agriculture, consumer applications as well as manufacturing. The companies also make engineered power transmission and fluid power solutions as well as chemistry solutions along with engineered equipment and technologies for oil and gas companies worldwide.
3 Trends Shaping the Future of Engineering - R&D Services Industry
Focus on Defense, Healthcare, Communication & Renewable Energy: The federal government’s investment in defense and cyber security is conducive to the industry’s growth. Also, increasing public investments in transportation, water infrastructure, utility plants and the healthcare market are anticipated to be conducive to the industry’s growth. Additionally, the infrastructure services business of the industry players continues to thrive, supported by robust demand from the communications industry.
The companies are well-positioned to gain from the renewable energy drive of the pro-environmental Biden administration. Development and deployment of technology solutions across the full spectrum of decarbonization efforts, including carbon management mitigation and compliance consulting, as well as all facets of infrastructure for providing carbon-free energy solutions, will benefit the companies going forward. Also, the players are gaining from the rising global demand for alternative nuclear energy as they provide engineering, procurement, construction and maintenance services to nuclear power plants.
Need for State-Of-The-Art Services: Increasing construction activities in U.S. government projects, which require state-of-the-art construction and engineering services, are expected to benefit the construction and engineering services industry. Also, rapid usage of advanced technologies to deliver smart buildings and mega-projects while identifying and checking margin contraction and costs are expected to be a major tailwind for the industry participants.
Supply-Chain Disruptions, Labor Shortage, Uncertain Economic Conditions & Competition: The companies continue to face high input costs and labor constraints. Apart from this, supply-chain disruption is a major bother. As the impact of the coronavirus outbreak continues, uncertain global economic conditions may create pressure on the demand for services provided by the industry players.
Meanwhile, the companies face intense competition in the global engineering, procurement and construction industry, hurting their contract prices and profit margins. Volatility in commodity prices and the cyclical nature of the industry’s commodity-based business lines pose significant challenges as well.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Engineering – R&D Services industry is a 19-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #203, which places it at the bottom 18% 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 gloomy near-term prospects. 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of tepid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s bottom-line growth potential. Since November 2021, the industry’s earnings estimates for 2022 have been revised 7.3% downward.
Despite the industry’s dreary near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms Sector, Lags S&P 500
The Zacks Engineering – R&D Services industry has performed better than the Zacks Construction sector but lagged the Zacks S&P 500 composite over the past year.
Over this period, the industry has gained 10.7% versus the sector’s 0.8% decline. Meanwhile, the S&P 500 has risen 11.7% in the said period.
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing Engineering – R&D Services stocks, the industry is currently trading at 19.3 versus the S&P 500’s 19.2 and the sector’s 14.7.
Over the past five years, the industry has traded as high as 25.5X, as low as 10.8X and at a median of 15.3X.
5 Engineering - R&D Services Stocks to Keep a Watch
Below we discuss five stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fluor: This Irving, TX-based engineering, procurement, construction and maintenance services provider has been benefiting from its "Building a Better Future" initiative — which aims at enhancing markets outside the traditional oil and gas sector, fair and balanced commercial deals, financial discipline as well as high-performing business culture. With a strengthened capital structure and a renewed focus on the key markets Fluor serves, the company remains well poised for 2022. Prospects look good, given cost-plus projects in backlog and decarbonization/energy transition projects.
Fluor’s earnings for fiscal 2021 are expected to grow 42.6%. This Zacks Rank #1 stock has gained a solid 41% over a year, faring better than the industry. Fluor has seen a 19.6% upward estimate revision for 2022 earnings over the past 30 days, depicting analysts’ optimism over its prospects.
AECOM: This Dallas, TX-based professional infrastructure consulting service provider has been making the most of the strength in the core transportation, water, and environment markets as well as solid backlog. Furthermore, its focus on Environmental, Social and Governance or ESG-related services and digital initiatives is encouraging. AECOM is also benefiting from accelerated investments in organic growth and expanded digital capabilities through Digital AECOM.
The company’s pipeline of opportunities is up double digits in the Americas design business. Based on clients' strengthening funding backdrop, including benefits from the $1.2-trillion U.S. infrastructure bill, AECOM expects its backlog to keep growing.
AECOM’s fiscal 2022 earnings are likely to grow 20.6%. This Zacks Rank #2 stock has seen a 3% upward estimate revision for fiscal 2022 earnings over the past 30 days. The stock has gained 16.5% over the past year, faring better than the industry.
Quanta Services: This Houston, TX-based company is a leading national provider of specialty contracting services and one of the largest contractors serving the transmission and distribution sectors of the North American electric utility industry. The company is set to deliver a resilient performance in 2022 and beyond despite a challenging environment related to supply-chain woes and inflation. It is benefiting from a three-pronged growth strategy and focus on the base business via supporting long-term programmatic spend of utilities.
Also, participating in the development of infrastructure that supports renewables and technology deployments such as 5G as well as electric vehicles will drive growth. It is to be noted that 80-90% of the company’s revenues are derived from utility, communications, and a few pipelines and industrial infrastructure services, which continue to remain strong.
Importantly, Quanta Services — a Zacks Rank #3 stock — has seen a 1.6% upward estimate revision for 2022 earnings over the past 30 days. The stock has gained 29.7% over the past year. Its earnings for 2022 are expected to grow 27.4%.
KBR: Headquartered in Houston, TX, this company provides professional services and technologies across the asset and program life-cycle within government services and hydrocarbons industries worldwide. Its mission-critical government services, high-end and differentiated government business work, strong margin performance, proprietary technology solutions along with a significant increase in backlog (particularly in Government Solution) are expected to boost earnings for 2022.
KBR’s stock has gained 67.2% in the past year, faring better than the industry. The company’s 2022 earnings are likely to grow 3.7%. This Zacks Rank #3 company has seen a 2% upward estimate revision for 2022 earnings over the past 30 days.
Altair Engineering: Based in Troy, MI, this global technology company provides software and cloud solutions in areas of simulation, high-performance computing, data analytics and artificial intelligence. Altair’s products, services and business models have been driving market share growth. ALTR continues to evolve its product portfolio with a combination of sustaining and disruptive innovations and recently announced the 2022.2 product update.
Altair’s earnings estimates for the current year have been revised 14.1% upward over the past 30 days. This Zacks Rank #3 stock has gained 6.6% over the past year. Its earnings for 2022 are expected to grow 10.6%.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Quanta Services, Inc. (PWR) : Free Stock Analysis Report
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