The construction sector tumbled in the first half thanks to higher material costs and a rising rate environment, which pushed up interest/mortgage rates. If this wasn't enough, Trump’s steel and aluminum import tariffs have raised further apprehensions. Much like the broader market that is also battling volatility this year, the housing industry is now in a bear territory, with a loss of 19.7% through the first six months. Overall, the construction sector is down 8.3% in the said period.
Can Solid U.S. Economy Override Negative Sentiment?
Limited land availability, higher material costs and a constrained mortgage environment are indeed restricting construction stocks from responding to growing demand. However, the construction space looks attractive this year given solid economic and consistent job growth. The Atlanta Federal Reserve is forecasting second-quarter GDP growth at a 3.8% annualized rate. The economy grew at a 2% pace in the first quarter.
Elevated construction spending in the United States, an impressive labor market scenario, modest inflation and Trump’s impetus to boost infrastructure spending have been triggering demand since the past few quarters.
Constructing Spending Likely to Continue Rising
Spending on U.S. construction projects inched up 0.4% in May from the prior month. The uptick in May brought total construction spending to a seasonally adjusted all-time high of $1.31 trillion, 4.5% higher than a year ago, the Commerce Departments said on Jul 2. For the first five months of the year, construction spending was 4.3% higher than the same period in 2017.
Spending on public works was stronger than private-sector construction projects in May. Total private construction rose 0.3%, with residential projects up 0.8% in May from April. On a year-over-year basis, private construction rose 4.4%. For the first five months of the year, the figure was 4.2% higher than the 2017 level.
Spending on government projects grew 0.7% in May month over month and 4.7% year over year. Spending has also surged 4.4% in the first five months of 2018.
Market pundits are optimistic about the sector and believes that construction spending will contribute to overall growth this year, despite rising interest rates.
However, the Trump administration’s tit-for-tat trade tariffs with its major partners like China, Canada, Mexico and the European Union cannot be ignored. Speculation is rife that tariffs could disrupt supply chains, undercut business investment and potentially wipe out the fiscal stimulus from a $1.5 trillion tax cut package.
2018 Earnings Vision
As per the Zacks Industry Rank, the Zacks Construction Sector is currently #6 out of 16 (top 38%), mirroring analysts’ optimism for the market’s earnings growth potential. Hence, investing in the construction sector might sound profitable right now.
The optimism can also be seen from the latest Earnings Outlook. Second-quarter earnings estimates for the construction sector started trending up since the period went underway. Earnings are expected to grow a solid 45% in Q2 on 22.4% top-line growth.
For 2018, total earnings for the construction sector in the S&P 500 cohort are expected to increase 41.8% (compared with 15.9% earnings growth registered in 2017) on the back of 18.4% revenue growth (versus 10.7% in 2017), which indeed looks compelling.
Construction Stocks that Lead the Way
However, given the month-to-month volatile figures, investment in the construction sector at times becomes difficult. We bring five construction stocks that have not only registered growth so far this year but also are expected to outperform through the rest of 2018. With the help of our Zacks Stock Screener, we have selected five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy), which justify a company’s strong fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
Boise Cascade Company (BCC - Free Report)
The Zacks Consensus Estimate for earnings for both the current year and the next have increased 20.6% and 4.7%, respectively, in the last 60 days, thus reflecting optimism in the stock and substantiating its Zacks Rank #1.
This wood products manufacturer and building materials distributor’s earnings for the current year are expected to grow 74.9%. The company has outperformed the broader industry so far this year (+12.4% vs -8.3%).
Altair Engineering Inc. (ALTR - Free Report)
Shares has advanced 41.3% this year. The Zacks Consensus Estimate for earnings for the current year has increased 3.8% in the last 60 days. The company is also expected to witness earnings growth of around 4% this year and 72.8% in 2019.
PGT Innovations, Inc. (PGTI - Free Report)
The Zacks Consensus Estimate for this Zacks Rank #2 stock’s 2018 earnings has increased 1.1% over the last 60 days. The company is also expected to witness earnings growth of around 52.5% this year and 14.9% in 2019. The company has outperformed the broader industry this year by 27.9%.
Trex Company, Inc. (TREX - Free Report)
The Zacks Consensus Estimate for this Zacks Rank #2 stock’s 2018 and 2019 earnings have increased 1.9% and 1.3%, respectively, over the last 60 days. The company is also expected to witness earnings growth of around 35.4% this year and 12.1% in 2019. The company has outperformed by 20.3% this year.
Rayonier Inc. (RYN - Free Report)
The Zacks Consensus Estimate for this Zacks Rank #2 stock’s 2018 and 2019 earnings have increased 1.4% each, respectively, over the last 60 days. The company is also expected to witness earnings growth of 10.8% this year. The company has outperformed the broader industry so far this year by 24%.
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