The positive momentum witnessed in the U.S. construction sector at the beginning of 2017 is looking somewhat shabby now. Tepid housing sales data owing to inventory shortage along with two devastating hurricanes (Harvey & Irma) has been causing damage to the industry’s sales pace in recent times.
The recent data reflects weakening sales figure with existing home sales (which make up a larger part of all the U.S. real estate activity) which fell to a one-year low in August (down 1.7%), per the latest report by National Association of Realtors (NAR). This marked the fourth decline in five months, bringing down the annual rate to the lowest level in 12 months. Housing starts dropped 0.8% sequentially in August. In July, existing home sales slipped 1.3% from the previous quarter, while housing starts dropped 4.8% sequentially.
August new-home sales ran at a seasonally adjusted annual pace of 560,000, per the latest report from the Commerce Department — the lowest annual rate since December 2016. This was 3.4% lower than the month ago and 1.2% lower than the August 2016 level.
Even housing starts, permits and completions dropped 4.8%, 4.1% and 6.2%, respectively, in July. New U.S. single-family home sales also unexpectedly fell 9.4% in July, the lowest level since December 2016.
Adding to the woes is the homebuilders’ confidence index that dipped 3 points in September from August. NAR also has cut its 2017 forecast for existing-home sales owing to a tepid spring selling season and the impact of hurricanes. The group now expects the sale of 5.44 million homes in 2017, down 0.2% from 5.45 million in 2016 and well below 5.52 million expected earlier.
Yet, the overall vision of the market remains positive. The housing market is expected to gradually recover throughout the rest of the year, banking on solid ongoing job market and economic growth. Again, re-building efforts and lost activity are expected to show up in 2018. As the hurricane-ravaged communities are rebuilt, activity could pick up, making way for higher demand later this year and into the next.
Again, the U.S. construction market in 2017 is expected to get an additional boost if, as announced, the Trump administration invests heavily in infrastructure improvements. Particularly, his plans of boosting infrastructure by rebuilding highways and other significant infrastructure like bridges, tunnels, airports, schools and hospitals have put the spotlight squarely on stocks related to the sector.
Half of the Zacks broad sectors (8 out of 16) are expected to be in the negative territory in the third quarter of 2017. But where does the construction sector stand in this prevailing earnings season? As far as estimates go, the overall picture isn’t at all that dreary. Per the Zacks latest Earnings Trends, the construction sector’s earnings are expected to increase 8.1% in Q3 as compared with 15.5% in the preceding quarter. Revenues are also expected to improve 10.5% (8.8% growth in Q2). For 2017, earnings are most likely to rise 14.2% (against 7.6% seen in 2016) on 9.1% revenue growth (6.9% a year ago), while margins are expected to improve to 0.31% from 0.04% a year ago.
In spite of the inventory woes and higher land/labor costs, it is a profitable strategy to zero in on a handful of construction stocks that are poised to beat earnings this quarter. An earnings beat would also pave the way for stock price appreciation.
Which Are the Right Picks?
Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the construction space. An easy way is to look at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) with a positive Earnings ESP usually hints at an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%.
For investors seeking to adopt this strategy, we have highlighted four construction stocks that may stand out this season.
Our first choice is Owens Corning (OC - Free Report) , engaged in the business of composite and building materials systems. The company delivered a positive earnings surprise in each of the trailing four quarters, with an average beat of 20.17%. For the third quarter, the Zacks Consensus Estimate for earnings is pegged at $1.26 a share.
For the upcoming release, the company has an Earnings ESP of +0.55% and a Zacks Rank #2. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The company is set to report third-quarter results on Oct 25 before the opening bell.
Secondly, we picked an integrated forest products company with substantial timber resources Potlatch Corporation (PCH - Free Report) . The company topped earnings estimates in three of the trailing four quarters with an average beat of 41.16%. It looks poised to beat expectations in the third quarter as well. The company carries a Zacks Rank #2 and has an Earnings ESP of +1.43%. The Zacks Consensus Estimate is pegged at 88 cents per share.
Potlatch is scheduled to report third-quarter results on Oct 23 after the closing bell.
Our third choice is a producer of wood-based panels, Norbord Inc. (OSB - Free Report) .
Last quarter, this company delivered a negative earnings surprise of 0.90% but surpassed estimates in two of the trailing four quarters, with an average beat of 5.10%. The Toronto, Canada headquartered company carries a Zacks Rank #3 and has an Earnings ESP of +0.81%. The Zacks Consensus Estimate is pegged at $1.23 per share.
Norbord will likely to announce third-quarter 2017 results on Oct 27.
Lastly, Louisiana-Pacific Corporation (LPX - Free Report) , a leading manufacturer of building materials and engineered wood products in the United States, Canada, Chile and Brazil, also seems to be a solid bet.
The company surpassed estimates in two of the trailing four quarters, with an average positive earnings surprise of 1.16%.
For the upcoming release, Louisiana-Pacific has a Zacks Rank #3 along with an Earnings ESP +3.49%. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at 76 cents per share.
The company is expected to report third-quarter 2017 results on Oct 30.
U.S. housing spending that had peaked in early 2006 has waned in the meantime due to various macro-economic factors. However, with a recovering economy and solid job market, the critical question is to choose the right construction stocks before they release their earnings numbers.
A close look at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to tap into the optimism in the sector.
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