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3 Stocks to Watch From a Thriving Heavy Construction Industry

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The Zacks Building Products - Heavy Construction industry is expected to remain in traction owing to a significant infrastructure initiative led by the U.S. government. This initiative aims to improve the nation's roads, bridges, and broadband connectivity. Industry participants are capitalizing on increased demand across various sectors, including communications, transmission, power, and other infrastructure projects. Despite facing challenges such as project delays, a competitive labor market, and rising costs, certain companies like EMCOR Group Inc. (EME - Free Report) , Dycom Industries, Inc. (DY - Free Report) , and Primoris Services Corporation (PRIM - Free Report) have effectively navigated these obstacles and are well-positioned to capitalize on strong market prospects. While macroeconomic hurdles may affect some customer plans, these companies are poised for growth in this dynamic sector.

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 the 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 the 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 investments 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. The 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. 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 and international markets.

Solid Inorganic Moves & Renewable Business Prospects: Acquisitions have been companies’ preferred mode of solidifying product portfolios and leveraging new business opportunities. Again, due to increased renewable project activity and the expansion of services in biomass and 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. The 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.

Macroeconomic Challenges: The biggest headwinds for the industry players are currently centered around macroeconomic challenges, labor availability and supply-chain delays. In addition to a tight labor market, a rise in raw material costs is a concern. 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. Macroeconomic effects may dampen the near-term execution of some customer plans.

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 #30, which places it in the top 12% 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 solid 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 the S&P 500, Lags Sector

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

Stocks in this industry have collectively rallied 39.5% versus the broader sector’s 40.4% rise. Meanwhile, the S&P 500 has jumped 18.8% 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 14.9X versus the S&P 500’s 18.5X and the sector’s 16.4X.

Over the past five years, the industry has traded as high as 18.2X, 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

3 Heavy Construction Stocks to Watch

Here, 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), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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, project execution strategies and acquisition policies. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.

EMCOR, currently sporting a Zacks Rank #1, has surged 85.4% over the past year. Also, 2023 and 2024 earnings estimates have increased to $11.03 and $11.76 per share from $9.74 and $10.55, respectively, over the past 60 days. Earnings for 2023 and 2024 are expected to grow 36.2% and 6.7%, respectively. EME surpassed earnings estimates in all the trailing four quarters, with the average surprise being 17.2%.

Price and Consensus: EME

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 $6.59 billion (as of the second quarter of 2023) and solid contract awards in the Energy/Renewables and Utilities segment depict incredible momentum going forward despite supply-chain and permitting challenges. Despite a challenging economic environment, PRIM’s key growth markets in renewables, power delivery and communications have demonstrated resilience.

PRIM, a Zacks Rank #2 stock, has rallied 91.6% over the past year. Also, 2023 and 2024 earnings estimates have increased to $2.70 and $3.01 per share from $2.67 and $2.98, respectively, over the past 60 days. This company surpassed earnings estimates in all the trailing four quarters, with the average surprise being 104.4%. Earnings for 2023 and 2024 are expected to grow 6.7% and 11.5%, respectively.

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 the higher demand for network bandwidth and mobile broadband, extended geographic reach and 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, the prospects of the Telecommunication business look good, given the increased customer needs to expand capacity and improve the performance of existing networks, and, in certain instances, deploy new networks. Backlog ($6.207 billion) activity at the end of the second quarter of fiscal 2024 reflects a solid performance, with the booking of new work and renewing existing work. Dycom expects considerable opportunities across an array of customers.

Dycom, a Zacks Rank #3 stock, has lost 7.3% over the past year. Nonetheless, DY has seen an upward estimate revision of 2.5% for fiscal 2024 earnings over the past 30 days to $6.56 per share. Earnings per share for fiscal 2024 are expected to grow 46.1%. DY surpassed earnings estimates in all the trailing four quarters, with the average surprise being 147.4%. It carries an impressive VGM Score of A, making it a potentially interesting investment opportunity.

Price and Consensus: DY

See More Zacks Research for These Tickers

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