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2 Stocks to Buy From the Prosperous Heavy Construction Industry

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Higher demand from end markets like communications, transmission and power as well as other infrastructural projects has been benefiting the Zacks Building Products - Heavy Construction industry. The U.S. administration’s major infrastructure initiative to improve the nation’s roads, bridges and broadband is adding to the bliss. However, unprecedented supply-chain issues and project delays, a tight labor market as well as rising costs are taking a toll on the industry players. Yet, companies like Granite Construction Incorporated (GVA - Free Report) and Dycom Industries, Inc. (DY - Free Report) are set to benefit from solid market prospects despite the abovementioned 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

U.S. Administration’s Infrastructural Endeavor: 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 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 of 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. In addition to a tight labor market, a rise in raw material costs has been making things worse. Meanwhile, the 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 10-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #61, which places it in the top 24% 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a bright 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 bottom-line growth potential. Since November 2022, the industry’s earnings estimates for 2023 have been revised 1.3% 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 7.8% versus the broader sector’s 6.1% decline. Meanwhile, the S&P 500 has slipped 10% 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 17.8X and the sector’s 14.6X.

Over the past five years, the industry has traded as high as 18.4X, as low as 7.5X and at a median of 13.2X, as the chart below shows.

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

2 Heavy Construction Stocks to Buy

Below, we have discussed two 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.

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 The Telecommunication business looks good, given increased customer need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks. Backlog ($6.116 billion) activity at the end of third-quarter fiscal 2023 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 #1, has gained 16.3% over the past year. Earnings per share for fiscal 2024 are expected to grow 28.1%.

Price and Consensus: DY

Granite Construction: Based in Watsonville, CA, this company is an infrastructure contractor and a construction materials producer in the United States. Overall, a robust market environment has been driving improved profitability across its businesses. Its sufficient liquidity position has enabled the company to opportunistically invest in its vertically integrated operations through organic investment and bolt-on acquisitions.

GVA, currently carrying a Zacks Rank #2, has gained 10.1% over the past year. Earnings for 2023 are expected to grow 12.1%.

Price and Consensus: GVA

In-Depth Zacks Research for the Tickers Above

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Dycom Industries, Inc. (DY) - free report >>

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