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Construction Spending Strong in February: 5 Stocks to Buy

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The U.S. Census Bureau recently reported slightly lower Construction spending in February from January’s revised reading. The metric declined 0.3% month over month and missed analysts’ expectations of 0.7% due to weaknesses in non-residential and public projects.

Nonetheless, the reported metric rose 10.7% from the February 2023 reading. Defying a decline in outlays on public projects, improved residential market, increased repair and remodeling activities, higher infrastructure investments and the Federal Government’s anticipation of potential rate cuts in the latter part of 2024 are encouraging.

Inside the Numbers

The private residential construction increased 0.7% month over month and 6.3% from the prior year’s levels. The improvement in new single-family construction in recent months, backed by a lack of existing home inventory, has contributed to the upside.

Spending on public construction projects declined 1.2% from January’s revised reading but increased 16.8% year over year. Public construction spending was up on an increase of 19.9% in the residential market and 16.8% in the non-residential market.

Key Catalysts Supporting Growth in the Construction Sector

The recent trends in the housing market are compelling growth for other related industries. The upside in residential construction is mainly supported by a shortage of existing houses for sale as well as improving inflation. Also, various strategies undertaken by homebuilders, such as price reductions and offering incentives to stimulate sales, are boosting order rates.

On Mar 18, the National Association of Home Builders (NAHB)/Wells Fargo reported a three-point month-over-month improvement in builder confidence to 51 for March 2024 in its recent Housing Market Index. March’s reading was the highest since July 2023.

Housing starts also jumped 10.7% in February from January, reported by the Commerce Department, beating the consensus estimate by 4.7%. Also, the February figure rose 5.9% on a year-over-year basis. Building permits — an indicator of construction activity — leaped 1.9% in February from January and 2.4% year over year. The February permit level surpassed analysts’ prediction by 1.9%.

These positive indicators are setting an upward trend and appear attractive for homebuyers. This apart, encouraging prospects in the repair and remodeling industry are gaining traction.

Apart from the residential market, non-residential players are banking on strong global trends in infrastructure modernization, energy transition, national security and a potential super-cycle in global supply-chain investments. Also, they are experiencing higher funding for carbon/ESG-related projects to pursue carbon capture and storage work.

Zacks Investment Research
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The Zacks Construction sector has risen 54.2% in the past year, compared favorably with the S&P 500 Index’s 27.6% rally. Companies like Toll Brothers, Inc. (TOL - Free Report) , Dream Finders Homes, Inc. (DFH - Free Report) , Century Communities, Inc. (CCS - Free Report) , Installed Building Products, Inc. (IBP - Free Report) and Armstrong World Industries, Inc. (AWI - Free Report) are expected to strengthen more in 2024 on the back of strong spending number. These Zacks Rank #1 (Strong Buy) stocks gained 112.3%, 223.9%, 50.2%, 125.7% and 71.9%, respectively, in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Top 5 Construction Stocks to Buy

Toll Brothers: Based in Horsham, PA, Toll Brothers is gaining from strong market demand, combined with its policy of boosting its supply of spec homes and focusing on operational efficiency. Also, TOL’s emphasis on affordable luxury communities and its build-to-order model bodes well. Since mid-January, TOL has experienced a notable surge in demand coinciding with the onset of the spring selling season. Considering the upward market trend, TOL expects home deliveries of 10,000-10,500 units in fiscal 2024, which implies growth from 9,597 units in fiscal 2023.

Toll Brothers has an expected revenue and earnings growth rate of 0.7% and 11.1%, respectively, for the current year (ending October 2024). The Zacks Consensus Estimate for current-year earnings per share (EPS) has improved to $13.73 from $13.32 over the past 30 days.

Dream Finders Homes: This Jacksonville, FL-based company operates as a holding company for Dream Finders Homes LLC, which is engaged in the homebuilding business in the United States. DFH operates through four segments: Southeast, Mid-Atlantic, Midwest, and Financial Services. DFH designs, constructs, and sells single-family entry-level, first-time and second-time move-up homes, as well as active adult homes and custom homes. DFH markets its homes under various brands, including Dream Finders Homes, DF Luxury, Craft Homes, and Coventry Homes.

Dream Finders Homes has an expected revenue and earnings growth rate of 15.7% and 12.5%, respectively, for the current year. The consensus estimate for 2024 EPS has improved to $3.14 from $2.81 over the past 30 days.

Century Communities: This Greenwood Village, CO-based company engages in the design, development, construction, marketing, and sale of single-family attached and detached homes. Century Communities continues to focus on increasing its community count and growth strategies. With the increasing market demand for homes, CCS began to reduce incentive offerings across the communities.

The consensus estimate for CCS’ 2024 EPS has been upwardly revised to $10.06 from $8.58 over the past 60 days. EPS for 2024 is expected to grow 24.4% on 11.1% higher revenues.

Installed Building Products: This Columbus, OH-based company is one of the nation's leading new residential insulation installers and a diversified installer of complementary building products. The company is poised to gain from favorable pricing strategies, geographic and product diversification strategies, as well as solid acquisitions despite the cyclicality of the U.S. housing market. IBP continues to prioritize profitable growth through its proven strategy of acquiring well-run installers of insulation and complementary building products.

IBP has seen an upward estimate revision for 2024 EPS over the past 30 days to $11.73 from $1.27. The estimated figure indicates 14.2% growth year over year on 8.3% revenue growth.

Armstrong World Industries: This Lancaster, PA-based leading global producer of ceiling systems designs, manufactures and sells ceiling systems (primarily mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt) globally. The company has been benefiting from an increase in average unit value, driven by favorable pricing and volumes. Also, contributions from recent acquisitions, digital initiatives and new product launches aided the uptrend. Owing to the improving trend, the company unveiled a solid 2024 outlook, portraying year-over-year growth of the key financial metrics.

AWI’s EPS estimates for 2024 have increased to $5.74 from $5.65 over the past 30 days. Its earnings are expected to rise 7.9% year over year on 4.1% higher revenues in 2024.

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