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Heavy Construction Industry Looks Good: 3 Stocks to Buy
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Unprecedented supply-chain issues and project delays, a tight labor market as well as rising costs are taking a toll on the Zacks Building Products - Heavy Construction industry. Nonetheless, solid growth in end markets like communications, transmission and power as well as other infrastructural projects have been benefiting the industry players. President Joe Biden’s major infrastructure initiative to improve the nation’s roads, bridges and broadband is adding to the bliss. EMCOR Group Inc. (EME - Free Report) , MasTec, Inc. (MTZ - Free Report) and Dycom Industries, Inc. (DY - 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 modern sustainable infrastructure and a clean future will have major implications for 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 should 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 companies’ preferred mode for solidifying product portfolios 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, should benefit the companies going forward.
Coronavirus-Related Woes: The biggest headwinds for the industry players are currently centered around 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 Bright Prospects
The Zacks Building Products - Heavy Construction industry is an 11-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #80, which places it in the top 32% 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 outperform 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 and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 4.9% versus the broader sector’s 19.5% decline. Meanwhile, the S&P 500 has slipped 16.8% 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 13.4X versus the S&P 500’s 17.1X and the sector’s 11.8X.
Over the past five years, the industry has traded as high as 18.4X, as low as 7.5X and at a median of 13.3X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
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 as well as proficient program management and network planning services. Yet, persistent challenges associated with the automotive and equipment supply chain are causes of concern. Also, macroeconomic uncertainty has been dampening some of its customers’ plans. Nonetheless, prospects of the Telecommunication business look good given increased customer need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks. Backlog ($6.028 billion) activity during the fiscal second 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 #2, has gained 47.6% over the past year. Earnings estimates have increased to $3.68 per share from $3.28 over the past 60 days. Earnings per share for fiscal 2023 are expected to grow 142.1%.
Price and Consensus: DY
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. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.
EMCOR, currently carrying a Zacks Rank #2, has gained 13.7% over the past year. Also, 2022 and 2023 earnings estimates have increased 0.3% and 0.2% over the past seven days, respectively. Earnings for 2022 and 2023 are expected to grow 9.8% and 13.7%, respectively.
Price and Consensus: EME
MasTec: Based in Coral Gables, FL, this is a leading infrastructure construction company operating mainly throughout North America. MasTec has been benefiting from solid performance across the non-Oil and Gas business, diversified business, strong backlog, and recent acquisitions. It is 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 positions the company to grow further in this pro-clean energy Biden’s administration.
MasTec, currently carrying a Zacks Rank #2, has lost 15.7% over the past year. That said, 2023 earnings estimates have increased to $5.59 from $5.57 per share over the past 60 days. Although earnings for 2022 are expected to decline 44.6%, the same for 2023 will likely increase 80.8%.
Price and Consensus: MTZ
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Heavy Construction Industry Looks Good: 3 Stocks to Buy
Unprecedented supply-chain issues and project delays, a tight labor market as well as rising costs are taking a toll on the Zacks Building Products - Heavy Construction industry. Nonetheless, solid growth in end markets like communications, transmission and power as well as other infrastructural projects have been benefiting the industry players. President Joe Biden’s major infrastructure initiative to improve the nation’s roads, bridges and broadband is adding to the bliss. EMCOR Group Inc. (EME - Free Report) , MasTec, Inc. (MTZ - Free Report) and Dycom Industries, Inc. (DY - 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 modern sustainable infrastructure and a clean future will have major implications for 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 should 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 companies’ preferred mode for solidifying product portfolios 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, should benefit the companies going forward.
Coronavirus-Related Woes: The biggest headwinds for the industry players are currently centered around 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 Bright Prospects
The Zacks Building Products - Heavy Construction industry is an 11-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #80, which places it in the top 32% 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 outperform 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 and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 4.9% versus the broader sector’s 19.5% decline. Meanwhile, the S&P 500 has slipped 16.8% 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 13.4X versus the S&P 500’s 17.1X and the sector’s 11.8X.
Over the past five years, the industry has traded as high as 18.4X, as low as 7.5X and at a median of 13.3X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
3 Heavy Construction Stocks to Buy
Below, we have discussed three stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 as well as proficient program management and network planning services. Yet, persistent challenges associated with the automotive and equipment supply chain are causes of concern. Also, macroeconomic uncertainty has been dampening some of its customers’ plans. Nonetheless, prospects of the Telecommunication business look good given increased customer need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks. Backlog ($6.028 billion) activity during the fiscal second 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 #2, has gained 47.6% over the past year. Earnings estimates have increased to $3.68 per share from $3.28 over the past 60 days. Earnings per share for fiscal 2023 are expected to grow 142.1%.
Price and Consensus: DY
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. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.
EMCOR, currently carrying a Zacks Rank #2, has gained 13.7% over the past year. Also, 2022 and 2023 earnings estimates have increased 0.3% and 0.2% over the past seven days, respectively. Earnings for 2022 and 2023 are expected to grow 9.8% and 13.7%, respectively.
Price and Consensus: EME
MasTec: Based in Coral Gables, FL, this is a leading infrastructure construction company operating mainly throughout North America. MasTec has been benefiting from solid performance across the non-Oil and Gas business, diversified business, strong backlog, and recent acquisitions. It is 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 positions the company to grow further in this pro-clean energy Biden’s administration.
MasTec, currently carrying a Zacks Rank #2, has lost 15.7% over the past year. That said, 2023 earnings estimates have increased to $5.59 from $5.57 per share over the past 60 days. Although earnings for 2022 are expected to decline 44.6%, the same for 2023 will likely increase 80.8%.
Price and Consensus: MTZ