Construction spending increased by a mere 0.1% in December 2013, sharply lower than the 0.8% gain for the earlier month. This is significantly lower than the gains made last year and, at first glance, seems to suggest that activity in this sector seems to be slowing down.
Engine of Employment
The fact that construction is one of the most crucial sectors for the economy was borne out once again by this month’s employment report. Construction added the highest number of jobs in January. The increase of 48,000 easily offset the decline of 22,000 in December.
Residential and nonresidential building added 13,000 and 8,000 jobs respectively. Meanwhile nonspecialty trade conductors added 13,000 jobs. A report from Automatic Data Processing, Inc. (ADP - Analyst Report), released a few days earlier had estimated that 25,000 jobs were added by private construction.
The Prospects of Non-Residential Spending
For 2013, the value of construction in the U.S. increased 4.8%. Spending on private construction increased by 8.5% for the year. The major contributor to private sector investment was residential construction, which grew by 18%. On the other hand, non-residential construction declined by 0.4% during the period.
However, the prospects in this sector are far from gloomy. Reacting to the data, Ken Simonson, chief economist with the Associated General Contractors of America (AGC) said, “Residential construction ended on a strong note in 2013 and should remain positive for at least the next several months. Meanwhile private non-residential spending appears to be poised for a rebound.”
Lagged but Sustainable Demand
Growth in investments on private non-residential construction usually lags behind the economy has a whole. A certain amount of growth has occurred in this area over the couple of years but there is more room for growth. Incidentally, a lot of this growth has happened in the energy and power sectors.
The boom in the oil and gas sector could lead to an increase in private non-residential construction in the current year. This will include manufacturing plants, pipelines, railroads and natural gas fuelling stations.
At the same time, communities located in areas where such activities are conducted can expect more housing, hotels and retail construction. According to the AGC, private non-residential spending should grow between 6 to 10% in 2014.
Below we present three companies operating in the non-residential construction domain with a diverse set of interests and capabilities, each of which also have a good Zacks Rank.
Quanta Services, Inc.
Quanta Services, Inc. provides infrastructure solutions, focusing on the natural gas and oil pipeline and electric power sectors. The company offers specialty contracting services, including design, installation and maintenance services.
Quanta Services, Inc, holds a Zacks Rank #2 (Buy) and has expected earnings growth of 13.60%. The forward price-to-earnings ratios (P/E) for the current financial year (F1) is relatively high at 17.55.
Fluor Corp. (FLR - Analyst Report) provides professional services, including engineering, procurement, construction and maintenance. The company also offers project management services worldwide, across such diverse domains as oil and gas, petrochemicals and manufacturing.
Currently the company holds a Zacks Rank #2(Buy) and has expected earnings growth of 9.60%. It has a P/E (F1) of 17.59.
AECOM Technology Corporation
Our third choice is AECOM Technology Corp. (ACM - Analyst Report). The company offers technical and management services worldwide to governments as well as private clients. It is a provider of planning, consulting and design services for infrastructure, commercial housing, power and utility facilities.
Besides a Zacks Rank #2 (Buy), AECOM Technology Corporation has expected earnings growth of 5.90%. It has a relatively higher P/E (F1) of 11.33.
Recently released growth numbers indicate that the economy is now set for better times. This is being supported by repeated reductions of the Fed stimulus package. As the economy continues to pick up steam, these stock picks are in a position to leverage the gains accruing to the construction sector.