Solid momentum in the residential market and the resumption of manufacturing and construction activity are expected to brighten up the fourth-quarter earnings picture for the construction sector. The Q4 earnings season has so far seen releases from approximately 64% of the construction companies. While 88.9% of them posted an earnings beat, 100% surpassed revenue estimates.
What’s Working in Favor of the Stocks?
The dynamic performance of the sector has been majorly buoyed by strong homebuilding activities, and the resumption of manufacturing and construction activities. Spending on construction — which accounts for about 4% of gross domestic product — jumped 4.7% year over year in 2020, per the latest U.S. Census Bureau report, led by strength in homebuilding. This positive was partly offset by persistent weakness in non-residential construction.
The sector has seen a strong year, primarily on the back of robust gains from homebuilding investments. Although challenges in the housing industry persist in the form of low supply levels/limited listings, adverse impact of COVID-19, shortage of skilled labor and a huge upsurge in lumber prices, factors like low mortgage rates and desire to own a home amid the pandemic-induced work-home-home trend worked in favor. Again, companies’ focus on entry-level buyers has been increasing. Persistent focus on growing demand for entry-level homes and addressing the need for lower-priced homes, given affordability concerns prevailing in the U.S. housing market, have been helping the companies to boost profitability. Despite economic uncertainty and persistently tight inventory levels, homebuilders have been extremely positive on market prospects, given the rising demand and suburban shift toward homebuilding backed by low interest rates. Solid home sales data depicts the true picture of this resilient market. The latest data from the National Association of Realtors reveals that existing home sales for the month of December reached their highest level since 2006. Existing home sales, which account for 90% of home sales in the United States, increased 5.6% year over year for 2020. Notably, the metric rose in two of the three consecutive months. Apart from the residential market, outlays on non-residential construction fell 1.7% in December 2020. Nonetheless, spending on nonresidential structures rebounded in the fourth quarter after four straight quarterly declines. Solid Q4 Expectations
The overall estimate picture is an encouraging one for the broader Zacks
Construction sector. Per the latest Earnings Outlook, construction sector earnings are expected to increase 38.2% for the fourth quarter, indicating an increase from 19.3% in the third quarter. Revenues are projected to increase 11.2%, suggesting a rise from 6.6% growth in the prior quarter. Notable Q4 Releases So Far
Fourth-quarter 2020 results of industry biggies like
Lennar Corporation ( LEN Quick Quote LEN - Free Report) , Fastenal Company ( FAST Quick Quote FAST - Free Report) , United Rentals, Inc. ( URI Quick Quote URI - Free Report) and Weyerhaeuser Company ( WY Quick Quote WY - Free Report) have been encouraging, defying an unprecedented health crisis. Lennar reported better-than-expected results for fourth-quarter fiscal 2020 (ended Nov 30, 2020), marking the seventh straight quarter of an earnings beat. Furthermore, Fastenal came up with better-than-expected results for fourth-quarter fiscal 2020 (ended Dec 31, 2020), courtesy of higher demand for personal protective equipment products. United Rentals’ fourth-quarter 2020 earnings and revenues beat the Zacks Consensus Estimate. In fact, both the top and bottom lines surpassed the consensus estimate for 12 straight quarters. Meanwhile, Weyerhaeuser’s fourth-quarter 2020 earnings missed the Zacks Consensus Estimate but revenues beat the same. Which are the Right Picks?
Given the headwinds, it is not easy to find stocks with the potential to trump earnings estimates. Here, the Zacks methodology comes in handy as it helps identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.
One can narrow down the list with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter. Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%. Earnings ESP is our proprietary methodology for determining stocks that have the best chance to pull a surprise in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Winning Stocks
For investors willing to adopt this strategy, we have highlighted five construction stocks that may stand out this earnings season.
Our first choice is North American Construction Group Ltd. ( NOA Quick Quote NOA - Free Report) or NACG — an American diversified forest products company based in Spokane, WA. The company topped earnings estimates in three of the trailing four quarters, with the average surprise being 38.1%. NACG is likely to beat expectations when it reports fourth-quarter 2020 results on Feb 17, after market close. Currently, the company carries a Zacks Rank #2 and has an Earnings ESP of +23.81%. You can see . the complete list of today’s Zacks #1 Rank stocks here Gradual recovery to pre-pandemic activity lines is expected to have driven growth. Also, the company has been constantly focusing on disciplined cost-containment initiatives and effectively operating fleet, albeit in smaller number. The primary initiatives for general and administrative cost reduction comprised mandated reduced work hours, and the complete halt of all discretionary as well as non-essential spending.
Next in line is
Watsco, Inc. ( WSO Quick Quote WSO - Free Report) . Headquartered in Miami, FL, this company distributes air conditioning, heating, and refrigeration equipment; as well as related parts and supplies in the United States, Canada, Mexico, and Puerto Rico. The company beat earnings estimates in two of the last four quarters, with the average surprise being 0.1%. The company is poised to beat expectations when it reports fourth-quarter 2020 results. This Zacks Rank #2 company has an Earnings ESP of +9.75%. Persistent focus on the e-commerce business has been driving growth. The company is aggressively leveraging technology platforms to better serve and protect customers, as well as employees. In addition to these, accretive acquisitions have been acting as positives.
We are also counting on
AECOM ( ACM Quick Quote ACM - Free Report) — a Los Angeles, CA-based company — that delivers professional services for program and construction management in the Americas, Europe, Middle East, Africa and Asia Pacific. The company beat earnings estimates in three of the last four quarters, with the average surprise being 9.5%. The company is poised to beat expectations when it reports first-quarter of fiscal 2021 results on Feb 8, after the market closes. It carries a Zacks Rank #2 and has an Earnings ESP of +5.88%, at present. AECOM’s strength across core transportation, water and environment markets is likely to support growth.
Another compelling pick is
Century Communities, Inc. ( CCS Quick Quote CCS - Free Report) . Headquartered in Greenwood Village, CO, this homebuilder is engaged in the design, development, construction, marketing, and sale of single-family attached as well as detached homes. The company beat earnings estimates in all the last four quarters, with the average being 43.5%. The company is poised to beat expectations when it reports fourth-quarter 2020 results on Feb 4, after market close. This Zacks Rank #2 company has an Earnings ESP of +2.09%. Continued focus on its strategic goal of capturing an ever-increasing share of entry-level homebuyer demand has been driving growth.
The final name on our list is
Owens Corning ( OC Quick Quote OC - Free Report) . This Toledo, OH-based company produces and sells glass fiber reinforcements, as well as other materials for composites, residential, commercial, and industrial building materials worldwide. The company beat earnings estimates in the last four quarters, with the average being 69.1%. The company is poised to beat expectations when it reports fourth-quarter 2020 results on Feb 17, before the market opens. This Zacks Rank #2 company has an Earnings ESP of +3.24%. It has been benefiting from market-leading businesses, innovative product and process technologies, as well as capabilities. Faster recovery in residential end markets, particularly in the United States, improved manufacturing leverage and strong cost controls will likely help it deliver solid results. 5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor. Today, See These 5 Potential Home Runs >>