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Infrastructural Push to Aid Engineering R&D Services Industry: 4 Stocks

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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 Zacks Engineering – R&D Services industry. Increasing investments in decarbonization of energy efficiency and energy transition projects also appear to be growth drivers. Persistent focus on enhancing the infrastructure of the country’s defense, healthcare, communication, and renewable energy is encouraging for prominent industry players like Jacobs Engineering Group Inc. (J - Free Report) , Quanta Services Inc. (PWR - Free Report) , KBR, Inc. (KBR - Free Report) as well as VSE Corporation (VSEC - 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. 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.

Also, 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. This apart, supply chain disruption is bothering the entire industry. 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, which hurts their contract prices and profit margins. Volatility in commodity prices and cyclical nature of the industry’s commodity-based business lines further pose significant challenges.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Engineering - R&D Services industry is a 20-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #85, which places it at the top 34% 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 impressive 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 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 bottom-line growth potential. Since July 2021, the industry’s earnings estimates for 2021 have been revised 3.4% upward.

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 61.4% compared with the sector’s rally of 31.4% and the S&P 500's rise of 40.7%.

One-Year Price Performance

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 25.7 versus the S&P 500’s 21.7 and the sector’s 14.7.

Over the past five years, the industry has traded as high as 25.7X, as low as 10.8X and at a median of 15.2X, as the chart below shows.

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

4 Engineering - R&D Services Stocks to Bet On

Below we have discussed four 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.

Jacobs Engineering Group: 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 solutions bode well.

Earnings for fiscal 2021 are expected to grow 13.9%. The stock has gained 28.9% year to date compared with the industry’s 32.7% rally. That said, Jacobs has seen a 0.6% upward estimate revision for fiscal 2021 earnings over the past 30 days, depicting analysts’ optimism over the company’s prospects.

Price & Consensus: J


 

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 2021.

The company’s 2021 earnings are likely to grow 30.6%. KBR has seen a 4.6% upward estimate revision for 2021 earnings over the past seven days. The stock has gained 37.2% year to date, faring better than the industry.

Price & Consensus: KBR




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 2021 and beyond despite a challenging environment. It is benefiting from a three-pronged growth strategy and strong margins from the Electric Power Infrastructure segment. Focus on the base business via supporting long-term programmatic spend of utilities, and 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 revenues are derived from utility, communications, and a few pipeline and industrial infrastructure services, which continue to remain strong.

Importantly, Quanta Services has seen a 1.3% upward estimate revision for 2021 earnings over the past 30 days. The stock has gained a solid 68.4% so far this year. Earnings for 2021 are expected to advance 22.3%.

Price & Consensus: PWR

 

VSE: Headquartered in Alexandria, VA, VSE is a diversified products and services aftermarket company in the United States. The company has been registering broad-based growth across operating segments. Solid organic growth within both distribution and MRO markets, market share gains within the business and general aviation market, the acquisition of Global Parts Group completed in July 2021, higher commercial fleet and e-commerce fulfillment sales, and the March 2021 acquisition of HAECO Special Services have been driving growth.

Although the company’s earnings estimates for the current year have been unchanged over the past 60 days, the stock has gained 44.3% so far this year, performing much better than the industry. Earnings for 2021 are expected to grow 6.1%.

Price & Consensus: VSEC


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