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Near-Term Prospects Bleak for Heavy Construction Industry

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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.

Let’s take a look at the industry’s three major themes:

  • Robust construction activity backed by increased construction spending in the United States has boosted demand in the heavy construction space in the past few quarters. In the first 10 months of 2018, total U.S. construction spending amounted to $1,096.4 billion, marking a 5.1% increase from $1,043.6 billion in the corresponding period in 2017. Public outlays jumped 7.5% and private spending grew 4.4% in the same period. Importantly, Trump’s $1.5-trillion infrastructure plan will likely call for more building and infrastructure spending in the near future, in turn, boosting revenues and profits for construction companies.
     
  • The industry is poised to gain from a significant number of project awards across multiple segments, including communications, transmission and power, and infrastructural projects in domestic as well as international markets. 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 will show sizable growth. Moreover, construction work for communications is expected to gain momentum given huge investments to expand network. Given the proliferation of smartphones, demand for network bandwidth and mobile broadband are expected to be higher.
     
  • Rising labor and material costs have been hurting profit margins. Steel and aluminum tariffs announced in 2018 continue to impact material costs. Meanwhile, U.S.-China trade tensions and Fed’s dovish stance on the current outlook for the U.S. economy raise concerns. As heavy construction activity depends heavily on the health of the economy, the expected economic slowdown is a concern. Fed officials now expect growth to moderate over the next couple of years.


Zacks Industry Rank Indicates Dull Prospects

The Zacks Building Products - Heavy Construction industry is a 10-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #185, which places it in the bottom 29% 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 gloomy 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 bottom 29% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since April 2018, the industry’s earnings estimate for 2018 and 2019 has gone down approximately 6.3% and 8%, respectively.

Despite the bleak near-term industry prospects, we present a few stocks that you can keep an eye on or continue to hold if they are already in your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector & S&P 500

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

The industry has declined 31.4% over this period compared with the S&P 500’s decline of 7.4% and the broader sector’s decrease of 31%.

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 10.7X versus the S&P 500’s 15.4X and the sector’s 10.9X.

Over the past five years, the industry has traded as high as 18.3X, as low as 10.7X and at the median of 15.3X, as the chart below shows.

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

 


Bottomline

A major boost in infrastructural and construction spending should continue to favor the industry’s performance. Solid growth in end markets like communications, transmission and power, and other infrastructural projects should provide support.

That said, rising costs, expected slowdown of the domestic economy and trade tensions are pressing concerns.

Currently, only one stock in the Zacks Heavy Construction industry carries a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock Corp. (GLDD - Free Report) : Headquartered in Oak Brook, IL, this company is the largest provider of dredging services in the United States. This Zacks Rank #1 stock’s 2019 EPS estimate has been revised almost 88% upward over the past 60 days.

Price and Consensus: GLDD

 

Investors may hold on to the following stocks, as they currently carry a Zacks Rank #3 (Hold) and have solid earnings growth prospects.

Orion Group Holdings, Inc. (ORN - Free Report) : This Houston, TX-based specialty construction company’s bottom line is expected to witness 355% growth for 2019. The company delivered positive average earnings surprise of 242.2% for the trailing four quarters.

Price and Consensus: ORN


Primoris Services Corp. (PRIM - Free Report) : This is a Dallas, TX-based specialty contractor and infrastructure company. The consensus EPS estimate for the company has increased 2.7% to $1.50 for 2018 over the past 60 days. It has an expected earnings growth rate of 39.7% for 2019.

Price and Consensus: PRIM



North American Construction Group Ltd. (NOA - Free Report) : This Alberta, U.S.-based heavy construction and mining services provider has an expected earnings growth rate of 159.1% for 2019.

Price and Consensus: NOA


EMCOR Group, Inc. (EME - Free Report) : This Norwalk, CT-based electrical and mechanical construction, and facilities services provider in the United States delivered four-quarter average positive surprise of 19.1%. Its long-term earnings growth rate is expected to be 15%.

Price and Consensus: EME

 



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