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Concrete & Aggregates Outlook Bright on High Public Spending

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The Zacks Building Products - Concrete & Aggregates industry consists of manufacturers, distributors and sellers of construction materials like aggregates, concrete, and other such items. The materials also include gypsum wallboard, recycled paperboard, concrete blocks, ready-mix concrete and oil and gas proppants.

Prominent stocks in this industry are Martin Marietta Materials, Inc. (MLM - Free Report) and Vulcan Materials Company (VMC - Free Report) .

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

  • The industry is poised to benefit from robust construction spending on government projects. The industry is also likely to gain from growth in public sector construction activity – mainly in large transportation projects and contract work for highways – as well as strong pricing. Public outlays of total U.S. construction spending  clear standout during 2019, with total spending rising 7.1% compared to 2018, the strongest gain since 2007. Notable gains in commercial, power, highway and street, amusement and recreation, and conservation and development have been the bright spots. Meanwhile, the housing market, which has borne the brunt of rising interests/mortgage rates and higher raw material costs since the end of 2017, has regained momentum buoyed by declining mortgage rates trend. The industry players are expected to reap the benefits of solid household formation attributable to declining mortgage/interest rates, steady economic growth and favorable demographics. The housing market rebound and Trump’s impetus to enhance the country’s infrastructure by upgrading highways, railroads, bridges and broadband are expected to be key catalysts for the industry.
     
  • The industry participants follow a well chalked-out acquisition plan to enhance domestic and international portfolios. Meanwhile, companies are increasingly focusing on reducing controllable costs and maximizing operating efficiency across business lines to generate higher earnings and cash flow.
     
  • However, the industry players are plagued with shortage of skilled laborers, rising wage costs and increasing material and transportation expenses. The companies use electricity, diesel fuel, liquid asphalt and other petroleum-based resources. Hence, supply-related woes and significant fluctuation in prices of these resources affect operating results. The businesses are also exposed to weather-related risks that affect production schedules and hence profitability. Excessive rainfall, flooding or severe drought jeopardize shipments and production. The first and fourth quarters are mostly affected by winter. Again, hurricanes in the Atlantic Ocean and Gulf Coast are the most active during the third and fourth quarters. These impediments may continue to bump up costs and mar profits of industry participants.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Building Products - Concrete & Aggregates industry is a 12-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #45, which places it in the top 18% 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive 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 earnings growth potential. Since December 2019, the industry’s earnings estimate for 2020 has gone up approximately 1.5%.

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 valuation picture.

Industry Outperforms Sector & S&P 500

The Zacks Building Products - Concrete & Aggregates industry has outperformed the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.

Stocks in this industry have collectively gained 29.6% versus the broader sector’s growth of 25.4%. Meanwhile, the S&P 500 has climbed 20.8%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing Building Products - Concrete & Aggregates stocks, the industry is currently trading at 21.6X versus the S&P 500’s 19.3X and the sector’s 16.1X.

Over the past five years, the industry has traded as high as 39.4X, as low as 12.9X and at the median of 20.6X, as the chart below shows.

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

 


Bottom Line

Indeed, weather-related woes, higher labor, freight and material costs are eating into margins of industry players. Nonetheless, a significant boost in infrastructural and construction spending should continue to favor the industry.

Below we present a stock from the Zacks Building Products - Concrete & Aggregates space that sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Forterra, Inc. (FRTA - Free Report) : Headquartered in Irving, TX-based is a manufacturer of concrete and clay building products. Its 2020 earnings estimates have moved 141.7% up in the past 30 days. It has an expected earnings growth rate of 680% for 2020.

Price and Consensus: FRTA

 

Investors can also keep an eye on the following Zacks Rank #3 (Hold) stocks with impressive prospects.

Cornerstone Building Brands, Inc. (CNR - Free Report) : Cary, NC-based company designs, engineers, manufactures, and markets external building products for the commercial, residential, and repair and remodel construction industries in North America. This stock has an expected earnings growth rate of 139.1% for 2020.

Price and Consensus: CNR


Eagle Materials Inc. (EXP - Free Report) : This Dallas, TX-based company produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. It has a three-five year expected earnings growth rate of 12%.

Price and Consensus: EXP


Vulcan Materials Company: This Birmingham, AL-based company produces and supplies construction aggregates, asphalt mix as well as ready-mixed concrete. The company has an expected earnings growth rate of 19.4% for 2020 and has a three-five year expected earnings growth rate of 18.5%.

Price and Consensus: VMC


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