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Engineering R&D Services Industry to Prosper: 5 Stocks in Focus

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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) , Quanta Services, Inc. (PWR - Free Report) , AECOM (ACM - Free Report) , as well as Mayville Engineering Company, Inc. (MEC - 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.

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 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, 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 trade war-led raw material cost increase are pressing concerns for the industry players. Also, as the impact of the coronavirus outbreak continues, uncertain global economic conditions will create a pressure on the 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 20-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #104, which places it at the top 41% 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 encouraging 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 December 2020, the industry’s earnings estimates for 2021 have been revised 39.6% 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 Underperforms S&P 500 & Sector

The Zacks Engineering – R&D Services industry has lagged the Zacks S&P 500 composite and the broader Zacks Construction sector over the past year.

Over this period, the industry has gained 11.2% compared with the broader sector’s rally of 26.2%. Meanwhile, the S&P 500 has risen 18.7% 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 21.9 versus the S&P 500’s 22.9 and the sector’s 17.1.

Over the past five years, the industry has traded as high as 22.8X, as low as 10.8X and at the median of 14.8X, as the chart below shows.

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

 

5 Engineering – R&D Services Stocks to Keep a Close Eye 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) or a Zacks Rank #3 (Hold). 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. This Zacks Rank #1 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 32.9% upward estimate revision for 2021 earnings over the past seven days. The stock has gained 43.6% in the past six months, outperforming the industry’s 11.2% rally. Earnings for 2021 are expected to grow 61.4%.

Price & Consensus: GTES


Howmet Aerospace Inc.: This Pittsburgh, PA-based company is a provider of advanced engineered solutions for aerospace and transportation industries. This Zacks Rank #2 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 lost 14.5% in the past year, earnings for 2021 are expected to grow 12.5%. Nevertheless, Howmet Aerospace has seen an upward estimate revision of 3.4% for 2021 bottom line over the past 30 days, depicting analysts’ optimism over its earnings prospects.

Price & Consensus: HWM

 


Quanta Services Inc.: 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 sector of the North American electric utility industry. This Zacks Rank #2 company is set to deliver a resilient performance in 2021 and beyond, despite a challenging environment. It is benefiting from strong margins from both Electric Power Infrastructure and Pipeline and Industrial Infrastructure Services segments. Focus on its 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. Notably, 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 0.2% upward estimate revision for 2021 earnings over the past 30 days. The stock has gained 93.3% in the past year. Earnings for 2021 are expected to advance 15.7%.
Price & Consensus: PWR



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 Zacks Rank #3 company’s earnings for fiscal 2021 are expected to grow 24.7%. The stock has gained 22.2% in the past year. AECOM has seen a 1.9% upward estimate revision for fiscal 2021 earnings over the past seven days.

Price & Consensus: ACM



Mayville Engineering Company, Inc.: Headquartered in Mayville, WI, this company operates as a contract manufacturer that serves heavy and medium-duty commercial vehicle, construction, powersports, agriculture, military, as well as other end markets in the United States. Although it is suffering from manufacturing volume reduction due to the ongoing pandemic and the continuation of customer destocking activities, particularly within Agriculture and Construction and Access Equipment end markets, the company is expected to benefit from the recent investments in technology and automation, acquisition synergies from the DMP buyout and latest consolidation of Greenwood, South Carolina capacity footprint.

Its 2021 earnings are likely to grow 225.2%. This Zacks Rank #3 company’s consensus estimate for earnings has increased 10.8% for 2021 over the past 60 days. The stock has gained 91.6% in the past year, faring better than the industry.
Price & Consensus: MEC

 

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