It was a great 2017 for the construction sector, buoyed by robust gains from home building investments and a rebounding U.S. economy. Despite political and economic uncertainties, the sector saw sustainable growth.
Spending on construction was up a sizeable 3.8% year over year in 2017, per the latest report from the U.S. Census Bureau. Of the total, although spending on government projects declined 2.5% in 2017, it grew 5.8% in private construction. Specially, residential construction in 2017 was 10.6% higher than the 2016 level.
Positives such as an improving economy, modest wage growth, low unemployment and positive consumer confidence raise optimism about the sector’s performance in 2018. Trump had vowed to double economic growth through an ambitious stimulus program featuring tax cuts, deregulation and higher infrastructure spending.
Indeed, there are concerns that are restricting the sector’s growth to some extent for quite a while now. The industry has been challenged by shortage of homes for sale, suitable land and skilled labor. Again, limited land availability is driving prices higher, putting a serious question mark on affordability.
Again, the brisk growth pace of the economy strengthens the case for the Federal Reserve to raise interest rates. That said, higher demand, booming economy along with solid job market will keep the momentum alive.
As we take a closer look at the Q4 earnings season, we see a steady improvement over the past few quarters. So far, this earnings season has seen releases from 251 S&P 500 members as of Feb 2, 2018. According to the latest Earnings Preview, total Q4 earnings are expected to be up 13% from the same period last year on 7.7% higher revenues compared with 6.7% earnings growth in the third quarter of 2017 on 5.9% rise in revenues.
The construction sector’s earnings are expected to increase 18.5% in Q4 compared with 11.6% in the earlier quarter. Revenues are also expected to improve 11% (12.3% growth in Q3).
Let us take a look at how the following construction companies are placed ahead of their quarterly release on February 8.
Our research shows that when a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) stock has a positive Earnings ESP, the chance of beating earnings estimates is high. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Masco Corporation (MAS - Free Report) is scheduled to report fourth-quarter 2017 results, before market open. The company managed to surpass/meet the Zacks Consensus Estimate in two of the trailing four quarters, with an average earnings beat of 1.44%.
Masco’s growth in the last few quarters has mostly been driven by steadily growing repair and remodel activity. The trend is expected to contribute in the to-be-reported quarter. Notably, more than 80% of Masco’s revenues are generated from repair/remodel activity. KraftMaid, the company’s leading repair and remodel brand, came up with a solid performance in retail and dealer channels, delivering double-digit growth on increased volumes in third-quarter 2017. The trend is expected to contribute in the to-be-reported quarter.
Also, Masco expects approximately $8 million in reset costs in the fourth quarter pertaining to a cabinet hardware program. The company will also incur approximately $5-$10 million in advertising costs as it is now resetting its display sets across the United States. Nonetheless, we are encouraged by the company’s cost-saving initiatives that have been driving margins over the past few quarters.
Overall, for the fourth quarter, the Zacks Consensus Estimate for total revenues is pegged at $1.83 billion, implying 4.3% growth. The improvement in top line is expected to be driven by increased revenues from the Plumbing and Decorative Architectural segments. This is likely to translate into higher earnings. The Zacks Consensus Estimate for earnings stands at 43 cents, reflecting a 30.3% year-over-year increase (read more: What's in the Cards for Masco This Earnings Season?).
Our proven model does not conclusively show that Ingredion is likely to beat earnings this quarter as it has an Earnings ESP of -0.69% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Watsco Inc. (WSO - Free Report) is the largest distributor of Heating, ventilation and air conditioning equipment as well as related parts and supplies (HVAC/R) in the United States. Watsco continues to transform its business into the digital age by investing in scalable platforms for mobile apps, e-commerce, business intelligence and supply-chain optimization. Its technology evolution continues to make progress. Watsco is likely to gain from its industry-leading technologies and had earlier expected e-commerce sales to touch $1 billion in 2017.
Watsco posted a negative earnings surprise of 6.19%. The company surpassed estimates once in the past four quarters and has an average negative surprise of 6.18%.
Our proven model conclusively hints at an earnings beat for the company this quarter, as Watsco has an Earnings ESP of +0.17% and Zacks Rank #3.
Overall, for the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at $1.00, reflecting 23.5% year-over-year growth. The consensus estimate for revenues is pegged at $965.3 million, implying a 5.7% increase.
Floor & Decor Holdings, Inc. (FND - Free Report) , a multi-channel specialty retailer of hard surface flooring and related accessories, is expected to report Q4 results on Feb 8.
Last quarter, the company delivered a positive earnings surprise of 21.43%. The company surpassed estimates in each of the past three quarters, with an average positive surprise of 18.9%.
The company posted strong results in the first nine months of 2017 and the trend is expected to continue in the fourth quarter, as it benefits from post-hurricane demand. Comparable store growth has been impressive with double-digit growth for eight consecutive years, driven primarily by growth in customer traffic.
Our proven model conclusively shows a beat for Floor & Decor this earnings season. The company has an Earnings ESP of +1.32% and a Zacks Rank #2.
For the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 18 cents. Meanwhile, the consensus estimate for revenues is at $388.3 million.
Zacks Top 10 Stocks for 2018
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2018?
Last year's 2017 Zacks Top 10 Stocks portfolio produced double-digit winners, including FMC Corp. and VMware which racked up stellar gains of +67.9% and +61%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.
Access Zacks Top 10 Stocks for 2018 today >>