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3 Heavy Construction Stocks to Counter Industry Challenges
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Solid growth in end markets like communications, transmission and power as well as other infrastructural projects will benefit the 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. Yet, coronavirus-induced disruptions, unprecedented supply chain issues and project delays, a tight labor market as well as rising costs are pressing concerns. Dycom Industries, Inc. (DY - Free Report) , Primoris Services Corporation (PRIM - Free Report) and Sterling Construction Company, Inc. (STRL - Free Report) are set to benefit from solid market prospects despite the above-mentioned headwinds.
Industry Description
The Zacks Building Products - Heavy Construction industry consists of mechanical and electrical construction, industrial and energy infrastructure as well as building service providers. This industry comprises heavy civil construction companies that specialize in the building and reconstruction of transportation projects including 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 announcement of President Joe Biden’s massive infrastructure plan to build a modern sustainable infrastructure and clean future will have major implications on the U.S. economy and the construction industry over the next five years. Biden’s plan for accelerated investment in far-reaching areas from roads and bridges to green spaces, water systems, electricity grids as well as universal broadband laid a new foundation for sustainable growth, withstanding the impacts of climate change and improving public health, including access to clean air and clean water. The aforesaid infrastructural expansion plan will be a boon for construction-related companies.
Strong Prospects in Telecommunication: The 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. The 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 market is poised to see sizable growth. The companies are well positioned to gain from the renewable energy drive of the 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 currently centered on the COVID-19 pandemic, labor availability and supply chain delays. The companies have been facing the impact of the same on project schedules, given governmental permitting and crew social-distancing mitigation. In addition to a tight labor market, a rise in raw material costs has been making things worse. 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 Dull 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 #199, which places it in the bottom 20% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of lower earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since December 2021, the industry’s earnings estimates for 2022 have been revised 4.2% downward.
Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
The Zacks Building Products - Heavy Construction industry has underperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 9.5% versus the broader sector’s 5.4% decline. Meanwhile, the S&P 500 has risen 7.3% in the said period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing heavy construction stocks, the industry is currently trading at 14.3X versus the S&P 500’s 18.8X and the sector’s 12.1X.
Over the past five years, the industry has traded as high as 18.3X, as low as 7.5X and at a median of 13.8X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
3 Heavy Construction Stocks to Keep a Watch On
Below we have discussed three stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sterling Construction: 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 the 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. Its diverse portfolio of end customers and geographies coupled with the strength of end-markets served has been driving growth despite headwinds from inflation and the supply chain.
Sterling currently carries a Zacks Rank #2 and has gained 31.3% over the past six months. Earnings for 2022 are expected to grow 30.3%.
Price and Consensus: STRL
Primoris Services: Based in Dallas, TX, this is a specialty contractor company operating in the United States and Canada. A robust backlog level of more than $4 billion and solid contract awards in the Energy/Renewables and Utilities segment depict incredible momentum going forward despite supply chain and permitting challenges. Utility-scale solar projects continued to drive the progress of the Energy/Renewables segment.
Primoris Services currently carries a Zacks Rank #2 and has gained 7.8% over the past six months, outperforming the industry’s 2.1% rise. Earnings for 2022 are expected to grow 12%.
Price and Consensus: PRIM
Dycom: Based in Palm Beach Gardens, Fl, Dycom is a specialty contracting service provider in the United States. The company has been benefiting from higher demand for network bandwidth and mobile broadband, extended geographic reach along with proficient program management and network planning services. Although persistent impacts of the complexity of a large customer program, lower year-over-year revenues related to other large customers and higher fuel costs are concerns, prospects of the Telecommunication business look good, given increased customers’ need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks. Backlog ($5.822 billion) activity during the fiscal fourth quarter reflects solid performance, with the booking of new work and renewing existing work. Dycom expects considerable opportunities across a broad array of customers.
Dycom, currently carrying a Zacks Rank #3, has gained 49.2% over the past six months. Earnings for 2022 are expected to grow 96.7%.
Price and Consensus: DY
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3 Heavy Construction Stocks to Counter Industry Challenges
Solid growth in end markets like communications, transmission and power as well as other infrastructural projects will benefit the 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. Yet, coronavirus-induced disruptions, unprecedented supply chain issues and project delays, a tight labor market as well as rising costs are pressing concerns. Dycom Industries, Inc. (DY - Free Report) , Primoris Services Corporation (PRIM - Free Report) and Sterling Construction Company, Inc. (STRL - Free Report) are set to benefit from solid market prospects despite the above-mentioned headwinds.
Industry Description
The Zacks Building Products - Heavy Construction industry consists of mechanical and electrical construction, industrial and energy infrastructure as well as building service providers. This industry comprises heavy civil construction companies that specialize in the building and reconstruction of transportation projects including 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 announcement of President Joe Biden’s massive infrastructure plan to build a modern sustainable infrastructure and clean future will have major implications on the U.S. economy and the construction industry over the next five years. Biden’s plan for accelerated investment in far-reaching areas from roads and bridges to green spaces, water systems, electricity grids as well as universal broadband laid a new foundation for sustainable growth, withstanding the impacts of climate change and improving public health, including access to clean air and clean water. The aforesaid infrastructural expansion plan will be a boon for construction-related companies.
Strong Prospects in Telecommunication: The 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. The 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 market is poised to see sizable growth. The companies are well positioned to gain from the renewable energy drive of the 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 currently centered on the COVID-19 pandemic, labor availability and supply chain delays. The companies have been facing the impact of the same on project schedules, given governmental permitting and crew social-distancing mitigation. In addition to a tight labor market, a rise in raw material costs has been making things worse. 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 Dull 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 #199, which places it in the bottom 20% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of lower earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since December 2021, the industry’s earnings estimates for 2022 have been revised 4.2% downward.
Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
The Zacks Building Products - Heavy Construction industry has underperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 9.5% versus the broader sector’s 5.4% decline. Meanwhile, the S&P 500 has risen 7.3% in the said period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing heavy construction stocks, the industry is currently trading at 14.3X versus the S&P 500’s 18.8X and the sector’s 12.1X.
Over the past five years, the industry has traded as high as 18.3X, as low as 7.5X and at a median of 13.8X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
3 Heavy Construction Stocks to Keep a Watch On
Below we have discussed three stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sterling Construction: 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 the 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. Its diverse portfolio of end customers and geographies coupled with the strength of end-markets served has been driving growth despite headwinds from inflation and the supply chain.
Sterling currently carries a Zacks Rank #2 and has gained 31.3% over the past six months. Earnings for 2022 are expected to grow 30.3%.
Price and Consensus: STRL
Primoris Services: Based in Dallas, TX, this is a specialty contractor company operating in the United States and Canada. A robust backlog level of more than $4 billion and solid contract awards in the Energy/Renewables and Utilities segment depict incredible momentum going forward despite supply chain and permitting challenges. Utility-scale solar projects continued to drive the progress of the Energy/Renewables segment.
Primoris Services currently carries a Zacks Rank #2 and has gained 7.8% over the past six months, outperforming the industry’s 2.1% rise. Earnings for 2022 are expected to grow 12%.
Price and Consensus: PRIM
Dycom: Based in Palm Beach Gardens, Fl, Dycom is a specialty contracting service provider in the United States. The company has been benefiting from higher demand for network bandwidth and mobile broadband, extended geographic reach along with proficient program management and network planning services. Although persistent impacts of the complexity of a large customer program, lower year-over-year revenues related to other large customers and higher fuel costs are concerns, prospects of the Telecommunication business look good, given increased customers’ need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks. Backlog ($5.822 billion) activity during the fiscal fourth quarter reflects solid performance, with the booking of new work and renewing existing work. Dycom expects considerable opportunities across a broad array of customers.
Dycom, currently carrying a Zacks Rank #3, has gained 49.2% over the past six months. Earnings for 2022 are expected to grow 96.7%.
Price and Consensus: DY