construction sector is expected to have been strong in the first quarter backed by resilient residential backdrop, and improvement in manufacturing, and infrastructural activities. The Q1 earnings season has so far seen releases from approximately 50% of construction companies. While 100% of them posted an earnings beat, 71.4% surpassed revenue estimates. Solid Q1 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 53.1% for the first quarter, indicating an increase from 31.5% in fourth-quarter 2020. Revenues are projected to increase 10.4%, suggesting a slight drop from 11.7% growth registered in the prior quarter. What’s Working in Favor of the Stocks?
The sector has seen a strong start to the 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, adverse impact of the COVID-19 pandemic, shortage of skilled labor and a huge upsurge in lumber prices, factors like low mortgage rates and the desire to own a home amid the pandemic-induced work-home-home trend worked in its favor.
Again, companies’ focus on entry-level buyers has been increasing. Persistent focus on growing the 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. Apart from the residential market, solid demand from non-residential and infrastructural activities for both private and public project work is expected to have supported growth. In addition, a disciplined approach in bidding, project management, strength in funding programs across the states, and higher demand for road repair and maintenance are likely to have acted as major tailwinds for the companies’ quarterly performance. Also, bolt-on acquisitions are also anticipated to have expanded their geographical reach and product portfolio. However, inclement weather conditions in February and higher raw material costs (especially lumber) are likely to have affected the companies’ margins. Additionally, higher land and labor costs along with the shortage of home supplies may have been risks. While inflation could limit margin upside, companies have been taking pricing actions, which should have helped them offset such headwinds to some extent. Notable Q1 Releases So Far
As a quick flashback, first-quarter 2021 results of industry biggies like
Lennar Corporation ( LEN Quick Quote LEN - Free Report) , Fastenal Company ( FAST Quick Quote FAST - Free Report) and United Rentals, Inc. ( URI Quick Quote URI - Free Report) have been encouraging, defying unprecedented health crisis. Lennar reported better-than-expected results for first-quarter fiscal 2021 (ended Feb 28, 2021), marking the eighth straight quarter of an earnings beat. Furthermore, Fastenal’s first-quarter earnings met the Zacks Consensus Estimate but revenues missed the same. United Rentals’ first-quarter 2021 earnings and revenues beat the Zacks Consensus Estimate. In fact, both the top and bottom lines surpassed the consensus estimate for 13 straight quarters. 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 delivering earnings beat 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.
Summit Materials, Inc. ( SUM Quick Quote SUM - Free Report) — which produces and sells construction materials as well as related downstream products — topped earnings estimates in three of the trailing four quarters, with the average surprise being 30.5%. Summit is likely to beat expectations when it reports first-quarter 2021 results on May 10, after market close. Currently, the company carries a Zacks Rank #3 and has an Earnings ESP of +9.43%. You can see . the complete list of today’s Zacks #1 Rank stocks here Similar to other aggregates and cement producers, Summit is expected to have witnessed weather-related woes in the first quarter, primarily in Texas. Also, inflation from hydrocarbon, insurance and labor is likely to have added to the negatives. Notably, first quarter is always the company’s lowest quarter in a year. That said, higher demand arising from strengthening of the housing market is encouraging. Also, the non-residential market has been seeing some improvements. Eagle Materials Inc. ( EXP Quick Quote EXP - Free Report) — which produces and supplies heavy construction materials, light building materials along with those used for oil and natural gas extraction in the United States — beat earnings estimates in all the last four quarters, with the average being 28.4%. It is poised to beat expectations when it reports fourth-quarter fiscal 2021 results on May 19, before the opening bell. This Zacks Rank #3 company has an Earnings ESP of +8.50%. Although weather-related headwinds and higher operating expenses related to the Texas joint venture cement facility are expected to reflect on its performance, strong residential demand, better wallboard pricing and improved profitability in cement are likely to have been major tailwinds. Martin Marietta Materials, Inc. ( MLM Quick Quote MLM - Free Report) — which produces and supplies construction aggregates and other heavy building materials, mainly cement, in the United States — topped earnings estimates in three of the trailing four quarters, with the average surprise being 10.5%. The company is likely to beat expectations when it reports first-quarter 2021 results on May 4, before market opens. Currently, the company carries a Zacks Rank #3 and has an Earnings ESP of +8.47%. Indeed, weak demand stemming from inclement weather in February and higher operating costs — mainly in cement — are likely to have weighed on its bottom line. Nonetheless, strong housing backdrop, cost-saving efforts and higher price realization are expected to have offset the negatives (read more: Martin Marietta to Post Q1 Earnings: What's in Store?) Floor & Decor Holdings, Inc. ( FND Quick Quote FND - Free Report) — which operates as a multi-channel specialty retailer of hard surface flooring and related accessories — beat earnings estimates in all the last four quarters, with the average being 33.2%. Floor & Decor is poised to beat expectations when it reports first-quarter fiscal 2021 results on May 6, after the market closes. It carries a Zacks Rank #3 and has an Earnings ESP of +6.78%, at present. Floor & Decor has been benefiting from a solid housing backdrop, rising job growth, substantial stimulus payouts and five strategic pillars of growth plan.
Los Angeles, CA-based
AECOM ( ACM Quick Quote ACM - Free Report) — which delivers professional services for program and construction management in the Americas, Europe, Middle East, Africa and Asia Pacific — beat earnings estimates in the last four quarters, with the average being 9.3%. The company is poised to beat expectations when it reports second-quarter fiscal 2021 results on May 10, after market close. This Zacks Rank #3 company has an Earnings ESP of +2.93%. Its continuous focus on delivering industry-leading margins, and unlocking capital to invest in growth as well as innovation are likely to have driven growth. Also, focus on higher-margin and lower-risk Professional Services businesses bodes well. AECOM’s strength across core transportation, water and environment markets is likely to have supported growth. These Stocks Are Poised to Soar Past the Pandemic
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