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Heavy Construction Industry Outlook: Near-Term Prospects Bleak

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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:

  • The coronavirus pandemic-related disruptions will weigh on the companies’ near-term results. The biggest headwinds for the industry players are centered around governmental permitting, crew social distancing mitigation and the impact they may have on project schedules along with potential project delays. Also, slowing global growth, tight labor market and trade war-induced rise in raw material costs pose significant challenges. Meanwhile, 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.
     
  • Nonetheless, ramp-up in projects related to 5G — the next generation of wireless connectivity — has been a silver lining for the industry players. Importantly, Trump’s impetus to upgrade the nation’s highways, railroads, bridges and broadband calls for more spending in the near future, which will boost revenues and profits 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 is poised to see sizable growth. Moreover, construction work for communications is expected to ramp up on huge investments in network expansion. Also, the proliferation of smartphones should drive demand for network bandwidth and mobile broadband. Notably, increased demand from telecom customers for wireline networks, wireless/wireline converged networks and wireless networks using 5G technologies has been benefiting the industry players.


Zacks Industry Rank Indicates Dull 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 #139, which places it in the bottom 45% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since January 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 23.7% and 36.4%, respectively, downward.

Despite the industry’s gloomy near-term view, we will present a few stocks that one can consider for their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

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.

Stocks in this industry have collectively lost 17.9% versus the broader sector’s growth of 9.8%. Meanwhile, the S&P 500 has risen 10.5%.

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 11.5X versus the S&P 500’s 23.1X and the sector’s 20.3X.

Over the past five years, the industry has traded as high as 18.3X, as low as 7.5X and at the median of 14.6X, as the chart below shows.

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


 


Bottom Line

Solid growth in end markets like communications, transmission and power, and other infrastructural projects is another encouraging factor. However, coronavirus-induced disruptions and project delays in the near term, a tight labor market, slowing global growth and rising costs are pressing concerns.

Below we present four 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 2020 have witnessed upward revision of 23.3% to $1.06 in the past 60 days. It has an expected earnings growth rate of 23.3% for 2020.

Price and Consensus: GLDD


Tutor Perini Corporation (TPC - Free Report) : Headquartered in Sylmar, CA, this company provides diversified general contracting, construction management and design-build services to private clients and public agencies worldwide. The consensus EPS estimate for this Zacks Rank #1 company has moved up 16.7% to $2.10 for 2020 over the last 60 days. It has an expected earnings growth rate of 200% for 2020.

Price and Consensus: TPC


Dycom Industries, Inc. (DY - Free Report) : This Palm Beach Gardens, FL-based specialty contracting service provider in the United States currently carries a Zacks Rank #2. The consensus EPS estimate for this company has moved up 4.2% to $1.98 for the current year over the last 30 days. It has an expected earnings growth rate of 37.2% for fiscal 2021.

Price and Consensus: DY


Orion Group Holdings, Inc. (ORN - Free Report) : Based in Houston, TX, this specialty construction company operates in the continental United States, Alaska, Canada, and the Caribbean Basin. The consensus EPS estimate for this Zacks Rank #2 company has moved up 10% to 22 cents for 2020 over the last 60 days.

Price and Consensus: ORN


Investors can also keep an eye on the below-mentioned stock with solid prospects.

North American Construction Group Ltd. (NOA - Free Report) : This Alberta, Canada-based heavy construction and mining services provider has a trailing 12-month return on equity or ROE of 27.5% compared with the industry’s 12.8%.

Price and Consensus: NOA




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