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5 Top Stocks From the Prospering Heavy Construction Industry

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Solid growth in end markets like communications, transmission and power, and other infrastructural projects will benefit companies in the Zacks Building Products - Heavy Construction industry.

Although coronavirus-induced disruptions and project delays in the near term, a tight labor market, slowing global growth and rising costs are pressing concerns, Primoris Services Corporation (PRIM - Free Report) , Orion Group Holdings, Inc. (ORN - Free Report) , Dycom Industries Inc. (DY - Free Report) , Sterling Construction Company, Inc. (STRL - Free Report) and Tutor Perini Corporation (TPC - Free Report) are set to benefit from the solid market prospects.

Industry Description

The Zacks Building Products - Heavy Construction industry consists of mechanical and electrical construction, industrial and energy infrastructure, and building service providers. The companies serve commercial, industrial, utility and institutional clients.

The industry players are engaged in engineering, construction and maintenance of communications infrastructure, oil and natural gas pipelines, and processing facilities for the energy and utilities industries. These firms are also engaged in dredging services in the United States and internationally.

3 Trends Shaping the Future of Heavy Construction Industry

Strong Prospects in Telecommunication: Ramp-up in projects related to 5G has been a silver lining for industry players. Increased demand from telecom customers for wireline networks, wireless/wireline converged networks and wireless networks using 5G technologies has been benefiting the industry players. Construction work for communications is expected to pick up on huge investments in network expansion. The proliferation of smartphones should drive demand for network bandwidth and mobile broadband.

Also, the U.S. administration’s endeavor to upgrade the nation’s highways, railroads, bridges and broadband calls for more spending in the near future, which will boost revenues and profits of construction companies. The industry is poised to gain from a significant number of project awards across multiple segments, including communications, health care, transmission and power, and infrastructural projects in domestic as well as international markets.

Solid Inorganic Moves & Renewable Business Prospects: Acquisitions have been the companies’ preferred mode of solidifying the product portfolio and leveraging new business opportunities. Again, owing to increased renewable project activity, and expansion of services in biomass and other smaller production facilities, the power generation and industrial construction market is poised to see sizable growth. Furthermore, 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, comprising all facets of infrastructure for providing carbon-free energy solutions will benefit the companies going forward.

Coronavirus-Related Woes: The biggest headwinds for the industry players are centered around governmental permitting, crew social-distancing mitigation and the impact these may have on project schedules. Also, slowing global growth, a tight labor market and trade war-induced rise in raw material costs pose significant challenges. Meanwhile, businesses of the industry players are susceptible to the cyclical nature of the markets in which clients operate and are dependent on the timing and funding of new awards. Hence, volatility in credits and operating risks associated with economic down-cycles are pressing concerns.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Heavy Construction industry is a 12-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #106, which places it in the top 42% 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 bright 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.

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 Sector & S&P 500

The Zacks Building Products - Heavy Construction industry has outperformed the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.

Stocks in this industry have collectively gained 41.8% versus the broader sector’s growth of 30.3%. Meanwhile, the S&P 500 has risen 26%.

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 heavy construction stocks, the industry is currently trading at 15.7X versus the S&P 500’s 22.5X and the sector’s 16.6X.

Over the past five years, the industry has traded as high as 18.3X, as low as 7.5X and at the median of 14.3X, as the chart below shows.

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

 

5 Heavy Construction Stocks to Keep a Close Eye On

Primoris Services Corporation: Headquartered in Dallas, TX, Primoris is a specialty contractor and infrastructure company. The company’s Pipeline, Power, Utilities and Transmission segments have been performing exceptionally well. Furthermore, the company’s acquisition of Future Infrastructure expands its utility services capabilities and directly aligns with its strategy to grow in large, higher-growth, higher-margin markets.

Currently, Primoris carries a Zacks Rank #1 (Strong Buy) and has seen a 10.8% upward estimate revisions for its 2021 earnings over the past 30 days. The stock has gained 89.3% in the past six months versus the industry’s 60.8% rally. Although earnings for 2021 are expected to grow a modest 0.9%, the same is expected to register 16.8% growth in 2022. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: PRIM




Orion Group Holdings, Inc.: Based in Houston, TX, this company operates as a specialty construction company. Continued improved operating performance in both segments — Marine and Concrete — has been benefiting the company. The company has been witnessing bid opportunities in both its segments and expects wider prospects when the headwinds from the COVID-19 pandemic subside. Orion’s strategy of expanding its structural concrete business, diverse end markets and broad range of construction capabilities and assets are expected to drive growth.

Currently, Orion carries a Zacks Rank #2 (Buy) and has seen 2.9% upward estimate revisions for its 2021 earnings over the past 30 days. The stock has gained 106.4% in the past six months.

Price and Consensus: ORN




Dycom Industries Inc.: Based in North America, Dycom is a specialty contracting firm operating in the telecom industry. Increased demand for network bandwidth and mobile broadband along with extensive deployment of 1-gigabit wireline networks is likely to benefit the company going forward. Moreover, the company’s strong financial position coupled with diligent operational execution allows it to undertake strategic initiatives for expanding market share.

Currently, Dycom carries a Zacks Rank #3 (Hold). The stock has gained 57.7% in the past six months. Earnings for fiscal 2022 are expected to grow 23.6%.

Price and Consensus: DY




Sterling Construction Company, Inc.: Headquartered in The Woodlands, TX, this company is engaged in the heavy civil construction, specialty services, and residential construction activities. The company is currently reaping the benefits of its transformed business portfolio and its overall project mix toward higher value, lower risk, and more profitable work. Its Specialty Services segment has been bolstered by the recent buyout of Plateau. Residential segment rebounded from the pandemic-related woes and is gaining strength from a faster-than-anticipated recovery of the Texas housing market and its expansion into the Houston market. Meanwhile, the company’s Heavy Civil business has been executing well on substantial heavy highway work.

Currently, Sterling carries a Zacks Rank #3 and has gained 57.7% in the past six months. Earnings for 2021 are expected to grow 21.6%.

Price and Consensus: STRL




Tutor Perini Corporation: Headquartered in Sylmar, CA, this company provides diversified general contracting, construction management and design-build services to private clients and public agencies worldwide. Prospects for this company appear bright given several large Civil segment projects’ bidding activities. The company has been benefiting from increased activities in large infrastructure projects.

This Zacks Rank #3 stock has gained 40.6% over the past six months. The company has an expected earnings growth rate for of 16.6% for 2021.

Price and Consensus: TPC


 

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