As we prepare to bid farewell to 2018, let’s take a look at how the construction sector has performed this year and what’s in store for 2019.
Things have been pretty distressing for the construction sector in 2018, thanks to higher raw material costs, rising mortgage rates, trade tensions and escalating freight expenses. The steel and aluminum tariffs announced earlier this year continued to bump up material costs. Again, the Trump administration’s tit-for-tat trade tariffs with major partners like China, Canada, Mexico and the European Union induced more volatility in the market that in turn reflected on stock performance.
Reflective of these, the Zacks Construction sector has collectively lost more than 28% since the beginning of 2018.
Nonetheless, robust construction spending in the United States, higher demand for the state-of-the-art construction and engineering services, an impressive labor market scenario and Trump’s impetus to boost infrastructure spending seem to be vital catalysts for the industry. Although the housing sector has slowed down due to rising interest rates and higher home prices, the non-residential market has been experiencing considerable growth. Overall, in the first 10 months of 2018, construction spending rose 5.1% year over year.
Sector’s Outlook for 2019
Per the recent Dodge Data & Analytics’ 2019 Dodge Construction Outlook, U.S. economic growth will be moderated by lower benefits from tax cuts. Both short and long-term interest rates are expected to rise. Consequently, growth in construction starts is expected to decelerate. U.S. construction starts are expected at $808 billion in 2019, almost in line with the 2018 estimated figure.
Per the study by Dodge Data & Analytics, 2% decline is expected for residential building, nonresidential building is likely to stay in line with 2018, while nonbuilding construction is expected to increase 3%. However, federal spending on construction programs is likely to increase after the completion of all federal appropriations bills for fiscal 2019.
Meanwhile, the National Association for Business Economics or NABE released an economic outlook on Dec 3, in which its panel lowered construction starts projection. For 2019, the panel expects starts to rise to 1.3 million units, showing a reduction of 50,000 units from NABE's October survey.
Overall, material costs, particularly of iron and steel and lumber, will continue to rise. Also, labor shortage is a major threat.
These factors have however been offset by stronger growth of the U.S. economy, leniency in bank lending standards, solid market fundamentals for commercial real estate, and increased federal funding for school construction and public works.
Meanwhile, the latest trade truce between the United States and China brings hope. The countries agreed on a ceasefire to reduce trade-related hostilities, following a dinner at the G20 Summit in Buenos Aires on Dec 1. According to the agreement, the nations will refrain from increasing tariffs or imposing new tariffs for 90 days (until Mar 1, 2019) as the two sides work toward a larger trade deal.
Per the latest Earnings Trends, earnings for the construction sector are likely to grow 39% in 2018, up from the 15.9% increase in 2017. Revenues are likely to improve 19.7% in 2018, compared with 10.7% growth registered in 2017.
4 Construction Stocks That Outpaced the Sector
Despite weakness in the Construction sector, the following four stocks not only outpaced the sector in 2018 but also are expected to outperform in the coming years. We have taken help of the Zacks Stock Screener to zero in on stocks that sport a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have gained so far this year defying all odds. You can see the complete list of today’s Zacks #1 Rank stocks here.
Great Lakes Dredge & Dock Corporation (GLDD - Free Report) is the largest provider of dredging services in the United States.
The company has a Zacks Rank #1 and has gained 40.3% year to date. The expected earnings growth rate for the current year is 111.1%.
Comfort Systems USA, Inc. (FIX - Free Report) is a heating, ventilation and air conditioning installation and maintenance services provider.
It carries a Zacks Rank #1 and has gained 7.3% year to date. The company is expected to register three-five year EPS growth rate of 10%.
Altair Engineering Inc. (ALTR - Free Report) is a product design and development, engineering software and cloud computing software company.
It carries a Zacks Rank #2 and has gained 23.4% year to date. The expected earnings growth rate for the current year is 23.1%.
Spirax-Sarco Engineering plc (SPXSF - Free Report) is a multi-national engineering group headquartered in Cheltenham, United Kingdom.
It carries a Zacks Rank #2 and has gained 9.2% year to date. The company is expected to see three-five year EPS growth rate of 8%.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
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