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Building Maintenance Outlook: Non-Residential Drives Demand

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The Zacks Building Products - Maintenance Service industry comprises providers of a wide range of services including electrical, lighting, cleaning, repair, replacement, heating, ventilation, air-conditioning (HVAC), plumbing, landscaping and pest control among others.

Here are the industry’s three major themes:

  • Since the industry participants offer services that consumers generally cannot delay, revenues and cash flows remain fairly stable through the economic cycle. Demand is currently in good shape despite a slowdown in the residential construction market, driven by rise in disposable and per capita income, lower unemployment rate and improving consumer confidence. In terms of non-residential, strength in the economy has been driving demand for offices and commercial buildings, a trend that will likely continue in the near to mid-term.
  • Ebbing trade war and interest rate fears should be a tailwind for the industry. Beijing and Washington are close to a deal that could lift almost all U.S. tariffs on $200 billion worth of Chinese goods as long as China promises to protect intellectual property rights and buy significant number of American products. Also, the Fed has signaled that it will be “patient” with further rate hikes this year. While tariff removal will put a check on increasing material costs for building developers, stalling of further rate hikes will prevent funding for projects from becoming more expensive.
  • Strict EHS policies in North America and Europe should increase implementation of building maintenance services. Rapid industrialization and urbanization will continue to drive demand for these services.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Maintenance Service  industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #60. This rank 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 solid near-term growth 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 sell-side analysts covering the companies in this industry have been steadily raising their estimates. Over the past year, the industry’s consensus earnings estimate for 2019 has increased 42.5%.

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 current valuation.

Industry Outperforms S&P 500, Lags Sector

The Zacks Building Products - Maintenance Service Industryhasoutpaced the Zacks S&P 500 composite but underperformed the broader Zacks Business Services Sector over the past year.

The industry has rallied 8.5% over this period compared with the S&P 500 composite and broader sector’s rise of 1.8% and 9.4%, respectively.

Industry’s Current Valuation

Comparing the industry with the Zacks S&P 500 composite on the basis of trailing 12-month price-to-earnings (P/E), which is a commonly used multiple for the industry, we see that the industry trades at 36.94X, higher than the S&P 500’s 17.68X. It is also ahead of the sector’s 26.40X.

Over the past five years, the industry has traded as high as 40.23X, as low as 24.27X and at the median of 28.72X.

Bottom Line

Robust construction activity in non-residential, commercial and industrial sectors is keeping demand forbuilding maintenance services in good shape. Abating trade war and interest rate fears should be a breather. Stricter EHS policies in North America and Europe should be a key demand driver, going forward.

While none of the stocks in the Zacks Building Products - Maintenance Service space currently sport a Zacks Rank #1 (Strong Buy), Team, Inc.(TISI - Free Report) carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Moreover, we believe investors should retain ABM Industries Incorporated (ABM - Free Report) , ServiceMaster Global Holdings, Inc. (SERV - Free Report) and Limbach Holdings, Inc. in their portfolios as these stocks carry a Zacks Rank #3 (Hold).

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