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5 Construction Stocks to Buy Ahead of Q4 Earnings

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With the official start to the Q4 earnings season less than two weeks away, let’s take a look at how the construction sector is placed in this upbeat market.

The construction sector has been stable through 2017 on sustainable growth despite multiple challenges. Spending on construction was up 4.2% year over year in the first 11 months of 2017, per the latest U.S. Census Bureau report.

Optimism surrounding the sector grew manifold post President Trump’s victory as one of his key priorities has been driving infrastructure investments. Although spending on government projects declined 3.4% year to date, it grew 3% in October, the highest monthly gain in three years, with spending at the federal, state and local levels rising.

The sector has seen a strong year mainly on the back of robust gains from home building investments. Homebuilding spending has increased 6.6% so far this year. Confidence level among the nation's homebuilders ended 2017 on a high note as the housing market index (HMI) was at 74 in December. This marks the highest reading since 1999.

Although challenges in the housing industry persist in the form of low supply levels/limited listings, adverse impact of hurricanes as well as rising prices, factors like strong consumer confidence, favorable demographics, pent-up demand, job gains and income growth work in favor.

Again, the rebound in the U.S. economy along with a decline in unemployment rate (4.1% in November) is encouraging. The November figure marked the lowest since December 2000. The United States has added jobs for 86 straight months, the longest streak so far. Moreover, Americans are highly optimistic about the economy with consumer confidence climbing to the highest level in 17 years.

The improvement in the construction sector’s Zacks Rank is reflective of the ongoing positive trend. The Zacks Construction sector rank jumped from 11 to 7 (out of 16 sectors) last week, reflecting 42 positive revisions versus 35 negative. Notably, a sector with a larger percentage of Zacks Rank #1 (Strong Buy) and 2 (Buy) stocks will have a better average than the rest.

It has advanced 28% in the past year, comparing favorably with 20.3% growth of the S&P 500.

 



 

Q4 Expectations

Overall, the revisions trend for Q4 estimates has been very favorable, with earnings estimates holding up a lot better relative to other comparable periods.

The construction sector is expected to register double-digit growth in the fourth quarter. Total fourth-quarter earnings for the sector are projected to increase 19.2% year over year compared with 11.6% growth registered in the prior quarter. Revenues are expected to increase 10% (12.3% last quarter) and margins are expected to grow 0.6% versus a 0.1% decline last quarter.

For the broader market (S&P 500), total earnings are expected to be up +8.8% in Q4 from the same period last year on +6.9% higher revenues, according to the latest Earnings Trends report.

Selecting the Winning Stocks

As the sector is already benefitting from the positive industry dynamics, it’s prudent to invest in a few construction stocks that are expected to report a significant uptick this earnings season.

We have taken the help of the Zacks Stock Screener to shortlist construction stocks with a Zacks Rank #1 or 2. These stocks are expected to report more than 20% year-over-year EPS growth.

Here are the top five stocks that passed the screen:

Patrick Industries, Inc. (PATK - Free Report) is expected to witness year-over-year EPS growth of 23.3% on 28.3% revenue growth in fourth-quarter 2017. The company delivered an average beat of 18.5% in the trailing four quarters. The company is expected to report quarterly results on Feb 15. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, Inc. (NVR - Free Report) carries a Zacks Rank of #2. It is likely to see year-over-year EPS growth of 29.5% in fourth-quarter 2017. It delivered positive surprises in the trailing four quarters, with an average beat of 17.17%. The company is expected to report quarterly earnings on Jan 24.

Armstrong World Industries Inc (AWI - Free Report) carries a Zacks Rank of #2. It is expected to witness year-over-year EPS growth of 45.6% in fourth-quarter 2017. Revenues are expected to increase 6.6% year over year. The company is likely to report quarterly results on Feb 26.

M/I Homes, Inc. (MHO - Free Report) carries a Zacks Rank #2. It is expected to witness year-over-year EPS growth of 55.2% in fourth-quarter 2017. Revenues are expected to increase 13% year over year. It delivered positive surprises in two of the last four quarters, with an average beat of 4.6%. The company is expected to report its quarterly earnings on Feb 1.

The Sherwin-Williams Company (SHW - Free Report) carries a Zacks Rank of #2. It is expected to witness year-over-year EPS growth of 35.9% on 41.6% revenue growth in the fourth quarter of 2017. It delivered positive surprises in three of the trailing four quarters, the average beat being 3.9%. The company is scheduled to report quarterly results on Jan 25.

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