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5 Construction Stocks Set to Carve a Beat in Q2 Earnings
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The construction sector has been shaken by shutdowns in the wake of the coronavirus pandemic. Although markets have been showing resiliency of late, let’s explore factors that are likely to have influenced the industry players’ June-quarter performances.
Coronavirus Impact on Q2 Earnings
Things are not healthy for construction as well as other industries for the June quarter, given disruptions caused by the coronavirus outbreak in the United States. Although market pundits predict a rebound in construction in the second half of the year, softness in demand due to general market uncertainty is expected to have impacted construction companies’ performance in the June quarter. Overall, slowdown in traffic and sales, project delays and cancellations are expected to reflect in Q2 results.
Nonetheless, there are some positive factors that might have somewhat aided the companies’ performance. These include sales of safety products and growth in public sector construction activity. Also, higher demand for affordable homes backed by a benign rate environment is likely to have given a boost to the companies’ top lines to some extent despite the adversities in the earlier part of the second quarter.
The U.S. residential market has been experiencing a profitable stretch, courtesy of favorable mortgage rates and lower supply of homes. Notably, the homebuilding industry only stalled for mid-March through April and began to reboot earlier than most. The companies are expected to have gained from continuous focus on driving demand for entry-level homes and addressing the need for lower-priced homes, given the affordability concerns. Notably, lower mortgage rates are expected to have somewhat offset headwinds like rising land and labor costs.
Apart from residential industry players, construction companies are expected to have gained from growth in public sector construction activity, mainly in large transportation projects and contract work for highways. After hitting rock-bottom in April, demand started picking up May onward. Projects associated with communications, transmission and power, and infrastructural activities in domestic as well as international markets are likely to have lent support. Again, increasing defense spending in major economies like the United States, rising public investment in water infrastructure and utility plants as well as encouraging prospects in the healthcare market are expected to have acted in favor.
Q2 Expectations Tough
The overall estimate picture is not an encouraging one for the construction sector. Per the latest Earnings Outlook, construction sector earnings are expected to decline 17.5% in Q2, compared with 13.4% growth in Q1. Revenues are projected to decrease 5.1% in Q2 versus 12.7% growth in Q1.
Notable Q2 Releases So Far
For a quick flashback, the second-quarter 2020 results of sector heavyweights like Lennar Corporation (LEN - Free Report) and Fastenal (FAST - Free Report) have been encouraging, defying unprecedented health crisis and significant business disruptions over the past months. Lennar reported better-than-expected results, marking the fifth straight quarter of an earnings beat. Furthermore, Fastenal Company (FAST - Free Report) came up with better-than-expected second-quarter results, courtesy of higher demand for personal protective equipment products.
Which Are the Right Picks?
Despite coronavirus-related disruptions, higher input costs and trade tensions, the construction space looks attractive on solid infrastructure activity and the Fed’s dovish stance.
Given the headwinds, it is not easy to find stocks with the potential to trump earnings estimates. Here, the Zacks methodology comes in handy as it helps identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.
One can trim down the list with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.
Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Winning Stocks
For investors willing to adopt this strategy, we have highlighted five construction stocks that may stand out this earnings season.
Our first choice is Floor & Decor Holdings, Inc. (FND - Free Report) — a multi-channel specialty retailer of hard surface flooring and related accessories. The company topped earnings estimates in the trailing four quarters, the average surprise being 20.7%. The company is likely to beat expectations when it reports second-quarter 2020 results on Jul 30.
Next in line is Foundation Building Materials, Inc. — a building products distributor in the United States and Canada. The company beat earnings estimates in the last four quarters, the average beat being 43.3%. The company is poised to beat expectations when it reports second-quarter 2020 results on Aug 3.
The company carries a Zacks Rank #3 and has an Earnings ESP of +28.57%.
Foundation Building Materials, Inc. Price and EPS Surprise
We are also counting on TopBuild Corp. (BLD - Free Report) , which is an installer and distributor of insulation and other building products to the U.S. construction industry. The company beat earnings estimates in the last four quarters, the average beat being 8.7%. The company is poised to beat expectations when it reports second-quarter 2020 results on Aug 4.
The company carries a Zacks Rank #1 and has an Earnings ESP of +15.61%.
Another compelling pick is Patrick Industries, Inc. (PATK - Free Report) , which manufactures and distributes building products and materials for the recreational vehicle, marine, manufactured housing, and industrial markets. The company beat earnings estimates in three of the last four quarters, the average beat being 9.8%.
The company is poised to beat expectations when it reports second-quarter 2020 results on Jul 30. It carries a Zacks Rank #1 and has an Earnings ESP of +12.50%.
The final name on our list is KBR, Inc. (KBR - Free Report) , a global engineering, construction and services firm. The company beat earnings estimates in three of the last four quarters, the average beat being 9.8%.
The company is poised to beat expectations when it reports second-quarter 2020 results on Aug 6. This Zacks Rank #3 company has an Earnings ESP of +11.11%.
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
5 Construction Stocks Set to Carve a Beat in Q2 Earnings
The construction sector has been shaken by shutdowns in the wake of the coronavirus pandemic. Although markets have been showing resiliency of late, let’s explore factors that are likely to have influenced the industry players’ June-quarter performances.
Coronavirus Impact on Q2 Earnings
Things are not healthy for construction as well as other industries for the June quarter, given disruptions caused by the coronavirus outbreak in the United States. Although market pundits predict a rebound in construction in the second half of the year, softness in demand due to general market uncertainty is expected to have impacted construction companies’ performance in the June quarter. Overall, slowdown in traffic and sales, project delays and cancellations are expected to reflect in Q2 results.
Nonetheless, there are some positive factors that might have somewhat aided the companies’ performance. These include sales of safety products and growth in public sector construction activity. Also, higher demand for affordable homes backed by a benign rate environment is likely to have given a boost to the companies’ top lines to some extent despite the adversities in the earlier part of the second quarter.
The U.S. residential market has been experiencing a profitable stretch, courtesy of favorable mortgage rates and lower supply of homes. Notably, the homebuilding industry only stalled for mid-March through April and began to reboot earlier than most. The companies are expected to have gained from continuous focus on driving demand for entry-level homes and addressing the need for lower-priced homes, given the affordability concerns. Notably, lower mortgage rates are expected to have somewhat offset headwinds like rising land and labor costs.
Apart from residential industry players, construction companies are expected to have gained from growth in public sector construction activity, mainly in large transportation projects and contract work for highways. After hitting rock-bottom in April, demand started picking up May onward. Projects associated with communications, transmission and power, and infrastructural activities in domestic as well as international markets are likely to have lent support. Again, increasing defense spending in major economies like the United States, rising public investment in water infrastructure and utility plants as well as encouraging prospects in the healthcare market are expected to have acted in favor.
Q2 Expectations Tough
The overall estimate picture is not an encouraging one for the construction sector. Per the latest Earnings Outlook, construction sector earnings are expected to decline 17.5% in Q2, compared with 13.4% growth in Q1. Revenues are projected to decrease 5.1% in Q2 versus 12.7% growth in Q1.
Notable Q2 Releases So Far
For a quick flashback, the second-quarter 2020 results of sector heavyweights like Lennar Corporation (LEN - Free Report) and Fastenal (FAST - Free Report) have been encouraging, defying unprecedented health crisis and significant business disruptions over the past months. Lennar reported better-than-expected results, marking the fifth straight quarter of an earnings beat. Furthermore, Fastenal Company (FAST - Free Report) came up with better-than-expected second-quarter results, courtesy of higher demand for personal protective equipment products.
Which Are the Right Picks?
Despite coronavirus-related disruptions, higher input costs and trade tensions, the construction space looks attractive on solid infrastructure activity and the Fed’s dovish stance.
Given the headwinds, it is not easy to find stocks with the potential to trump earnings estimates. Here, the Zacks methodology comes in handy as it helps identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.
One can trim down the list with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.
Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Winning Stocks
For investors willing to adopt this strategy, we have highlighted five construction stocks that may stand out this earnings season.
Our first choice is Floor & Decor Holdings, Inc. (FND - Free Report) — a multi-channel specialty retailer of hard surface flooring and related accessories. The company topped earnings estimates in the trailing four quarters, the average surprise being 20.7%. The company is likely to beat expectations when it reports second-quarter 2020 results on Jul 30.
The company carries a Zacks Rank #3 and has an Earnings ESP of +78.16%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Floor Decor Holdings, Inc. Price and EPS Surprise
Floor Decor Holdings, Inc. price-eps-surprise | Floor Decor Holdings, Inc. Quote
Next in line is Foundation Building Materials, Inc. — a building products distributor in the United States and Canada. The company beat earnings estimates in the last four quarters, the average beat being 43.3%. The company is poised to beat expectations when it reports second-quarter 2020 results on Aug 3.
The company carries a Zacks Rank #3 and has an Earnings ESP of +28.57%.
Foundation Building Materials, Inc. Price and EPS Surprise
Foundation Building Materials, Inc. price-eps-surprise | Foundation Building Materials, Inc. Quote
We are also counting on TopBuild Corp. (BLD - Free Report) , which is an installer and distributor of insulation and other building products to the U.S. construction industry. The company beat earnings estimates in the last four quarters, the average beat being 8.7%. The company is poised to beat expectations when it reports second-quarter 2020 results on Aug 4.
The company carries a Zacks Rank #1 and has an Earnings ESP of +15.61%.
TopBuild Corp. Price and EPS Surprise
TopBuild Corp. price-eps-surprise | TopBuild Corp. Quote
Another compelling pick is Patrick Industries, Inc. (PATK - Free Report) , which manufactures and distributes building products and materials for the recreational vehicle, marine, manufactured housing, and industrial markets. The company beat earnings estimates in three of the last four quarters, the average beat being 9.8%.
The company is poised to beat expectations when it reports second-quarter 2020 results on Jul 30. It carries a Zacks Rank #1 and has an Earnings ESP of +12.50%.
Patrick Industries, Inc. Price and EPS Surprise
Patrick Industries, Inc. price-eps-surprise | Patrick Industries, Inc. Quote
The final name on our list is KBR, Inc. (KBR - Free Report) , a global engineering, construction and services firm. The company beat earnings estimates in three of the last four quarters, the average beat being 9.8%.
The company is poised to beat expectations when it reports second-quarter 2020 results on Aug 6. This Zacks Rank #3 company has an Earnings ESP of +11.11%.
KBR, Inc. Price and EPS Surprise
KBR, Inc. price-eps-surprise | KBR, Inc. Quote
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>