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Top 5 Stocks From Thriving Engineering R&D Services Industry
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A major boost in infrastructural spending (mainly government projects), advanced construction and engineering services along with prudent cost-management practices should lend support to the Zacks Engineering – R&D Services industry. Furthermore, continuous focus on lifting the infrastructure of the country’s defense, healthcare, communication and renewable energy is encouraging for prominent players of the industry like Gates Industrial Corporation PLC ((GTES - Free Report) ), Howmet Aerospace Inc. (HWM - Free Report) , Jacobs Engineering Group Inc. (J - Free Report) , AECOM (ACM - Free Report) and ChampionX Corporation (CHX - Free Report) .
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 to oil and gas companies worldwide.
4 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. Moreover, increasing public investments in transportation, water infrastructure, utility plant and healthcare market are anticipated to prove 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.
Also, companies are well positioned to gain from the renewable energy drive of 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 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.
Challenges in Energy Markets & Project Delays: Overall, energy markets have been facing major challenges due to the COVID-19 pandemic. Customers have been restricting onsite activity for obtaining services. Also, they have been deferring maintenance and certain turnaround projects owing to the pandemic. Also, volatility in commodity prices and cyclical nature of the industry’s commodity-based business lines pose significant challenges. Some of the companies have also been witnessing a dearth of larger pipeline projects owing to volatility in capital spending by customers.
Trade War & Uncertain Economic Conditions: In addition to COVID-led disruptions, a tight labor market and increase in raw material costs are pressing concerns for the industry players. Also, as the impact of the coronavirus outbreak continues, uncertain global economic conditions will create pressure on demand for services provided by the industry players.
Again, significant cost overruns (as the prices of several companies’ contracts are fixed) have been hurting the bottom line of some of the companies. The companies also face intense competition in the global engineering, procurement and construction industry, which hurts their contract prices and profit margins.
Zacks Industry Rank Indicates Bright 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 #117, which places it at the top 46% 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 April 2021, the industry’s earnings estimates for 2021 and 2022 have been revised 5.4% and 7.1% upward, respectively.
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 Outperforms S&P 500 & Sector
The Zacks Engineering – R&D Services industry has performed better than the Zacks S&P 500 composite and the Zacks Construction sector over the past year.
Over this period, the industry has gained 72.8% versus the sector’s rally of 50.1%. Meanwhile, the S&P 500 has risen 37.6% in the said period.
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 Engineering – R&D Services stocks, the industry is currently trading at 21.3 versus the S&P 500’s 21.6 and the sector’s 15.
Over the past five years, the industry has traded as high as 23.8X, as low as 10.8X and at the median of 14.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Gates Industrial Corporation plc: This Denver, CO-based company manufactures and sells engineered power transmission as well as fluid power solutions worldwide. The company is poised to benefit from continuous demand for mission-critical components globally. With an improved, more-flexible manufacturing footprint, revitalized product portfolio and focused organic growth initiatives, it is expected to gain in 2021.
Importantly, Gates Industrial has seen a 12.3% upward estimate revision for 2021 earnings over the past 60 days. The stock has gained 33.9% in the past six months, outperforming the industry’s 24.7% rally. Earnings for 2021 are expected to grow 82.9%.
Price & Consensus: GTES
Howmet Aerospace Inc.: This Pittsburgh, PA-based company is a provider of advanced engineered solutions for aerospace and transportation industries. The company has been benefiting from growth in the defense and industrial gas turbine market, offsetting the disruptions in commercial aerospace and commercial transportation markets, primarily due to the COVID-19 pandemic and 737 MAX production declines. It expects defense aerospace to grow in the near term on strong demand for the Joint Strike Fighter on both new airplane builds and engine spares. Also, its rapid cost-containment actions and ability to quickly flex variable spending have been aiding margins.
Although the stock has gained 21.3% over the past six months, earnings for 2021 are expected to grow 22.5%. Also, Howmet Aerospace has seen an upward estimate revision of 6.5% for 2021 bottom line over the past 60 days, depicting analysts’ optimism over the stock’s earnings prospects.
Price & Consensus: HWM
Jacobs Engineering Group Inc.: Dallas, TX-based Jacobs is one of the leading providers of professional, technical and construction services to industrial, commercial and governmental clients. Higher backlog, acquisitions and efforts to focus on high-value business are likely to benefit the company going forward. Also, digital focus and leadership in strategic end-markets that include space exploration, life sciences, cyber, as well as water solution bode well.
This company’s earnings for fiscal 2021 are expected to grow 11.7%. The stock has gained 25.1% over the past six months. Jacobs has seen a 5.2% upward estimate revision for fiscal 2021 earnings over the past 60 days.
Price & Consensus: J
AECOM: This Los Angeles, CA-based company engages in designing, building, financing and operating infrastructure assets worldwide. Despite economic pressure in a few domestic and international markets, a solid backlog level and high win rates on key pursuits are resulting in market share gains that position AECOM for outperformance in the near term. Again, it has been benefiting from successful execution of the G&A reduction plan, restructuring efforts and favorable end-market trends.
This company’s earnings for fiscal 2021 are expected to grow 27%. The stock has gained 26.6% over the past six months. AECOM has seen a 1.9% upward estimate revision for fiscal 2021 earnings over the past 60 days.
Price & Consensus: ACM
ChampionX Corporation: Based in The Woodlands, TX, this company offers chemistry solutions, and engineered equipment and technologies to oil and gas companies worldwide. Positive momentum in its shorter-cycle North American businesses and a seasonal uptick in international operations are expected to drive growth for ChampionX. With volume improvements, pricing realization and cost synergies, it expects meaningful margin rate improvement going forward. ChampionX, formerly known as Apergy, completed the merger of the businesses of Apergy Corporation and ChampionX Holding Inc., the former upstream energy business of Ecolab Inc. in June 2020. The combined entity brings together a unique platform with best-in-class product lines in artificial lift, production chemicals, and digital technology to provide the full spectrum of production-optimization solutions to customers.
Importantly, ChampionX has seen a 31.6% upward estimate revision for 2021 earnings over the past 60 days. The stock has gained 93.3% in the past six months. Earnings for 2021 are expected to grow 363.2%.
Price & Consensus: CHX
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Image: Bigstock
Top 5 Stocks From Thriving Engineering R&D Services Industry
A major boost in infrastructural spending (mainly government projects), advanced construction and engineering services along with prudent cost-management practices should lend support to the Zacks Engineering – R&D Services industry. Furthermore, continuous focus on lifting the infrastructure of the country’s defense, healthcare, communication and renewable energy is encouraging for prominent players of the industry like Gates Industrial Corporation PLC ((GTES - Free Report) ), Howmet Aerospace Inc. (HWM - Free Report) , Jacobs Engineering Group Inc. (J - Free Report) , AECOM (ACM - Free Report) and ChampionX Corporation (CHX - Free Report) .
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 to oil and gas companies worldwide.
4 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. Moreover, increasing public investments in transportation, water infrastructure, utility plant and healthcare market are anticipated to prove 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.
Also, companies are well positioned to gain from the renewable energy drive of 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 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.
Challenges in Energy Markets & Project Delays: Overall, energy markets have been facing major challenges due to the COVID-19 pandemic. Customers have been restricting onsite activity for obtaining services. Also, they have been deferring maintenance and certain turnaround projects owing to the pandemic. Also, volatility in commodity prices and cyclical nature of the industry’s commodity-based business lines pose significant challenges. Some of the companies have also been witnessing a dearth of larger pipeline projects owing to volatility in capital spending by customers.
Trade War & Uncertain Economic Conditions: In addition to COVID-led disruptions, a tight labor market and increase in raw material costs are pressing concerns for the industry players. Also, as the impact of the coronavirus outbreak continues, uncertain global economic conditions will create pressure on demand for services provided by the industry players.
Again, significant cost overruns (as the prices of several companies’ contracts are fixed) have been hurting the bottom line of some of the companies. The companies also face intense competition in the global engineering, procurement and construction industry, which hurts their contract prices and profit margins.
Zacks Industry Rank Indicates Bright 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 #117, which places it at the top 46% 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 April 2021, the industry’s earnings estimates for 2021 and 2022 have been revised 5.4% and 7.1% upward, respectively.
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 Outperforms S&P 500 & Sector
The Zacks Engineering – R&D Services industry has performed better than the Zacks S&P 500 composite and the Zacks Construction sector over the past year.
Over this period, the industry has gained 72.8% versus the sector’s rally of 50.1%. Meanwhile, the S&P 500 has risen 37.6% in the said period.
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 Engineering – R&D Services stocks, the industry is currently trading at 21.3 versus the S&P 500’s 21.6 and the sector’s 15.
Over the past five years, the industry has traded as high as 23.8X, as low as 10.8X and at the median of 14.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
5 Engineering - R&D Services Stocks to Bet On
Below we have discussed five stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Gates Industrial Corporation plc: This Denver, CO-based company manufactures and sells engineered power transmission as well as fluid power solutions worldwide. The company is poised to benefit from continuous demand for mission-critical components globally. With an improved, more-flexible manufacturing footprint, revitalized product portfolio and focused organic growth initiatives, it is expected to gain in 2021.
Importantly, Gates Industrial has seen a 12.3% upward estimate revision for 2021 earnings over the past 60 days. The stock has gained 33.9% in the past six months, outperforming the industry’s 24.7% rally. Earnings for 2021 are expected to grow 82.9%.
Price & Consensus: GTES
Howmet Aerospace Inc.: This Pittsburgh, PA-based company is a provider of advanced engineered solutions for aerospace and transportation industries. The company has been benefiting from growth in the defense and industrial gas turbine market, offsetting the disruptions in commercial aerospace and commercial transportation markets, primarily due to the COVID-19 pandemic and 737 MAX production declines. It expects defense aerospace to grow in the near term on strong demand for the Joint Strike Fighter on both new airplane builds and engine spares. Also, its rapid cost-containment actions and ability to quickly flex variable spending have been aiding margins.
Although the stock has gained 21.3% over the past six months, earnings for 2021 are expected to grow 22.5%. Also, Howmet Aerospace has seen an upward estimate revision of 6.5% for 2021 bottom line over the past 60 days, depicting analysts’ optimism over the stock’s earnings prospects.
Price & Consensus: HWM
Jacobs Engineering Group Inc.: Dallas, TX-based Jacobs is one of the leading providers of professional, technical and construction services to industrial, commercial and governmental clients. Higher backlog, acquisitions and efforts to focus on high-value business are likely to benefit the company going forward. Also, digital focus and leadership in strategic end-markets that include space exploration, life sciences, cyber, as well as water solution bode well.
This company’s earnings for fiscal 2021 are expected to grow 11.7%. The stock has gained 25.1% over the past six months. Jacobs has seen a 5.2% upward estimate revision for fiscal 2021 earnings over the past 60 days.
Price & Consensus: J
AECOM: This Los Angeles, CA-based company engages in designing, building, financing and operating infrastructure assets worldwide. Despite economic pressure in a few domestic and international markets, a solid backlog level and high win rates on key pursuits are resulting in market share gains that position AECOM for outperformance in the near term. Again, it has been benefiting from successful execution of the G&A reduction plan, restructuring efforts and favorable end-market trends.
This company’s earnings for fiscal 2021 are expected to grow 27%. The stock has gained 26.6% over the past six months. AECOM has seen a 1.9% upward estimate revision for fiscal 2021 earnings over the past 60 days.
Price & Consensus: ACM
ChampionX Corporation: Based in The Woodlands, TX, this company offers chemistry solutions, and engineered equipment and technologies to oil and gas companies worldwide. Positive momentum in its shorter-cycle North American businesses and a seasonal uptick in international operations are expected to drive growth for ChampionX. With volume improvements, pricing realization and cost synergies, it expects meaningful margin rate improvement going forward. ChampionX, formerly known as Apergy, completed the merger of the businesses of Apergy Corporation and ChampionX Holding Inc., the former upstream energy business of Ecolab Inc. in June 2020. The combined entity brings together a unique platform with best-in-class product lines in artificial lift, production chemicals, and digital technology to provide the full spectrum of production-optimization solutions to customers.
Importantly, ChampionX has seen a 31.6% upward estimate revision for 2021 earnings over the past 60 days. The stock has gained 93.3% in the past six months. Earnings for 2021 are expected to grow 363.2%.
Price & Consensus: CHX
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The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
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