Back to top

Image: Bigstock

Heavy Construction Industry Looks Impressive: 4 Top Stocks to Buy

Read MoreHide Full Article

Solid growth in end markets like communications, transmission and power as well as other infrastructural projects will benefit companies in the Zacks Building Products - Heavy Construction industry. President Joe Biden’s major infrastructure initiative to improve the nation’s roads, bridges and broadband is adding to the bliss. Although coronavirus-induced disruptions and project delays, a tight labor market as well as rising costs are pressing concerns in the near term, MasTec, Inc. (MTZ - Free Report) , EMCOR Group, Inc. (EME - Free Report) , Orion Group Holdings, Inc. (ORN - Free Report) and Sterling Construction Company, Inc. (STRL - Free Report) are set to benefit from 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. This industry comprises heavy civil construction companies that specialize in the building and reconstruction of transportation projects that include highways, roads, bridges, airfields, ports and light rail. 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 as well as processing facilities for energy and utility industries. These firms are also engaged in mining and dredging services in the United States and internationally.

4 Trends Shaping the Future of Heavy Construction Industry

Biden’s Infrastructural Deal: The recent announcement of President Joe Biden’s agreement on a $973-billion infrastructure plan to build a modern sustainable infrastructure and clean future will have major implications for the U.S. economy and construction industry over the next five years. Biden’s plan for accelerated investment includes far-reaching areas from roads and bridges to green spaces, water systems, electricity grids as well as universal broadband for laying a new foundation for sustainable growth — withstanding the impacts of climate change — along with improving public health, including access to clean air and clean water. The aforesaid infrastructural expansion plan will be a boon for construction-related companies like Dycom Industries, Inc. (DY - Free Report) , EMCOR, MasTec, North American Construction Group Ltd. (NOA - Free Report) and others in the same industry.

Strong Prospects in Telecommunication: Ramp-up of projects related to 5G has been a silver lining for the 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. Proliferation of smartphones should drive demand for network bandwidth and mobile broadband. Also, the industry is poised to gain from a significant number of project awards across multiple segments, including communications, health care, transmission and power along with 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 as well as other smaller production facilities, the power generation and industrial construction markets are poised to see sizable growth. Furthermore, the 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 #115, which places it in the top 46% 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 strong 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 positioning 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 April 2021, the industry’s earnings estimates for 2021 have been revised 4.8% 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 Outperforms Sector & S&P 500

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

Stocks in this industry have collectively gained 100.6% compared with the broader sector’s growth of 57.2%. Meanwhile, the S&P 500 has risen 39.7% 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 heavy construction stocks, the industry is currently trading at 16.6X versus the S&P 500’s 21.8X and the sector’s 15.1X.

Over the past five years, the industry has traded as high as 18.3X, as low as 7.5X and at a median of 14.1X, as the chart below shows.

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

4 Heavy Construction Stocks to Buy

Below we have discussed four stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

MasTec: Based in Coral Gables, FL, this is a leading infrastructure construction company operating mainly throughout North America. MasTec has been benefiting from strong backlog, segmental prospects and the recent acquisitions. Being one of the largest clean energy contractors in the country, its expertise in constructing wind farms, solar farms, biomass facilities, high-voltage transmission lines, substations, battery storage and hydrogen-enabled solutions uniquely position the company to enhance growth in this pro-clean energy Biden’s administration.

Currently, MasTec carries a Zacks Rank #1 and has seen a 6.1% upward estimate revision for 2021 earnings over the past 60 days. The stock has gained 55.6% year to date versus the industry’s 31.2% rally. Although earnings for 2021 are expected to grow a modest 1.8%, the same is expected to register 13% growth in 2022.

Price and Consensus: MTZ

EMCOR Group: Headquartered in Norwalk, CT, this company provides electrical and mechanical construction, and facilities services in the United States. EMCOR has been benefiting from solid execution in the U.S. Construction segment — comprising the U.S. Mechanical and Electrical Construction units — as well as disciplined cost control amid the COVID-19 pandemic. Also accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.

EMCOR currently carries a Zacks Rank #2 and the stock has gained 34.6% so far this year. Also, 2021 earnings estimates have increased 0.4% over the past seven days. Earnings for 2021 are expected to grow 5.2%.

Price and Consensus: EME

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

Currently, Orion carries a Zacks Rank #2 and the stock has gained 16% so far this year. Although the stock has underperformed the industry, its 2021 earnings estimates have increased 2.8% over the past 60 days, depicting analysts’ optimism over the company’s prospects. Although earnings for 2021 are expected to decline, the same is expected to register 52% growth in 2022.

Price and Consensus: ORN

Sterling Construction Company, Inc.: Headquartered in The Woodlands, TX, this company is engaged in heavy civil construction, specialty services, and residential construction activities. It is currently reaping benefits from its transformed business portfolio and overall project mix toward higher value, lower risk, and more profitable work. The Specialty Services segment has been bolstered by the recent buyout of Plateau. The Residential segment is gaining strength from 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.

Sterling currently carries a Zacks Rank #2 and has gained 29.7% year to date. Earnings for 2021 are expected to grow 23%. Its 2021 earnings estimates have increased 1.1% over the past 60 days.

Price and Consensus: STRL

Zacks Names “Single Best Pick to Double

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research SherazMian hand-picks one to have the most explosive upside of all.

You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.

Free: See Our Top Stock and 4 Runners Up >>