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Heavy Construction Outlook: Bullish on Solid Public Outlays

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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 — mainly in non-residential markets — has been spurring demand for heavy construction companies over the past few quarters. Precisely, public outlays on total U.S. construction spending amounted to $32.4 billion in the first seven months of 2019, reflecting an increase of 5.6% year over year, led by notable gains in commercial, highway and street conservation and development, and transportation. Importantly, Trump’s impetus to upgrade the nation’s highways, railroads, bridges and broadband calls for more spending in the near future, in turn, giving a boost to the revenue and profit-generating potential of construction companies.
  • The industry is poised to gain from a significant number of project awards across multiple segments, including communications, health care, 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 in expanding network. Also, the proliferation of smartphones should drive demand for network bandwidth and mobile broadband.
  • Rising labor cost and higher raw material costs owing to the trade war are hurting profit margins. Meanwhile, U.S.-China trade tensions raise concerns. Notably, on May 9, 2019, the Trump administration raised tariffs from the existing 10% to 25% on $200 billion in China-made products. This prolonged trade war with China is gradually heating up, thereby hurting industry players’ margins.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Heavy Construction industry is a 13-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #84, which places it in the top 33% 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 outperforms 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 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 stocks in this industry have collectively gained 0.1% versus the broader sector’s growth of 2.3%. Meanwhile, the S&P 500 has gained 1.5%.

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 12.6X versus the S&P 500’s 17.1X and the sector’s 14.9X.

Over the past five years, the industry has traded as high as 18.3X, as low as 10.4X and at the median of 14.9X, as the chart below shows.

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

Bottom Line

Indeed, rising costsand trade tensions are pressing concerns. That said, a major boost in infrastructural and construction spending should continue to favor the industry’s performance. The industry is expected to shape up well buoyed by solid growth in end markets like communications, transmission and power, and other infrastructural projects.

Below we present five stocks from the Zacks Heavy Construction space that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock Corp. (GLDD - Free Report) provides dredging services in the United States and internationally. The stock carries a Zacks Rank #1 and its EPS estimates for the current year have witnessed upward revision of 8.8% to 74 cents in the past 60 days. It has an expected earnings growth rate of 335.3% for the current year.

Price and Consensus: GLDD

MasTec, Inc. (MTZ - Free Report) , one of the largest providers of construction services to the telecommunications industry in the United States, also sports a Zacks Rank #1. The consensus EPS estimate for this company has increased 1.4% to $5.06 for the current year, over the last 30 days. Earnings for 2019 are expected to increase 34.2%.

Price and Consensus: MTZ

North American Construction Group Ltd. (NOA - Free Report) : This Alberta, Canada-based heavy construction and mining services provider has an expected earnings growth rate of 226.2% for 2019. The consensus EPS estimate for this company has increased 28% to $1.37 for the current year, over the last 60 days.

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 currently carries a Zacks Rank #2. The consensus EPS estimate for this company has increased 4.4% to $5.69 for the current year, over the last 60 days. Earnings are anticipated to grow 15.9% for 2019.

Price and Consensus: EME

Primoris Services Corp. (PRIM - Free Report) : This is a Dallas, TX-based specialty contractor and infrastructure company. The consensus EPS estimate for this Zacks Rank #2 stock has increased 1.8% to $1.69 for 2019 over the past 60 days. Earnings are expected to increase 12.7% for 2019.

Price and Consensus: PRIM

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