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Construction on Firm Footing Post Q3 Earnings: 5 Top Picks

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After rising interest/mortgage rates and the trade war fiasco wreaked havoc for the construction sector in the later part of 2018, Fed’s dovish stance and a solid labor market have been working in favor since the start of 2019. Stellar Q3 earnings releases by the industry players were also reassuring.

Of the 91.7% construction companies that have reported so far, 72.7% has beat earnings estimates and 90.9% surpassed the revenue mark. Per the latest Earnings Preview, the construction sector’s earnings and revenues increased 7.2% and 5.3% year over year in the third quarter.

Considering the numbers reported so far as well as estimates for yet-to-be-released results, total earnings for the S&P 500 construction companies are expected to register 6.4% growth, highlighting a marked improvement from the 5.4% decline in the second quarter of 2019. The sector is also expected to witness revenue growth of 2.3% versus flat growth in Q2. Notably, Construction is one of the six, out of 16 broad Zacks sectors, that is likely to register growth in the quarter.

Residential Construction Turns the Corner

The much-anticipated residential market rebound on solid growth in demand for new homes, thanks to declining borrowing costs and an impressive job market, is welcome news for investors. Given a favorable macroeconomic backdrop and expectations of consistently low interest rates, demand for housing is likely to keep scaling higher. Builders’ sentiments for newly-built single-family homes remained strong in November, thanks to the above-mentioned factors.

As far as housing data goes, the recent report from the Commerce Department reveals that building permits — a measure of future home construction — jumped to a more than 12-year high, indicating strength in the market amid lower mortgage rates. This was driven by the single-family housing division, which grew 3.2% to the highest level since August 2007. Housing starts improved 3.8% to a seasonally adjusted annual rate of 1.314 million units for the month of October, with single-family construction rising for the fifth straight month and activity in the volatile multi-family sector rebounding strongly.

Public Sector Growth Leads to Bullish Expectations

Along with the residential rebound, growth in public sector construction activity, mainly in large transportation projects and contract work for highways, and solid pricing have been benefitting construction companies. Again, increasing defense spending in major economies like the United States, higher public investment in worldwide transportation, water infrastructure and utility plant as well as improving prospects of the healthcare market have led to bullish expectations for construction companies in the quarters to come. Meanwhile, 5G deployment significantly enhances the opportunities for these companies’ wireless and wireline businesses.

Stocks to Buy

The positive momentum that the construction sector has been experiencing is evident from its Zacks Rank. The Zacks Construction sector has gained 40.1% so far this year, outperforming the broader market’s (S&P 500) 23.4% rally. Notably, Construction ranks among the top 38% of all Zacks sectors.

So, let’s take a look at five companies that delivered a positive earnings surprise in the third quarter and are witnessing upward revisions in earnings estimates for 2019 or 2020. These companies have either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have outperformed the sector as well as the broader market. You can see the complete list of today's Zacks #1 Rank stocks here.

We also take into account Growth Score, which depicts a true sense of sustainability of its growth. The stocks have a Growth Score of A or B.

Foundation Building Materials, Inc. : This distributor of building products in the United States and Canada currently sports a Zacks Rank #1 and has a Growth Score of A. Earnings for the current year and the next are expected to rise 148.8% and 20.6%, respectively.

Forterra, Inc. FRTA: This company, which manufactures and sells pipe and precast products in the United States, Canada, and Mexico, currently sports a Zacks Rank #1 and has a Growth Score of A. The estimated earnings growth rate is 77.3% for the current year and 340% for 2020.

Installed Building Products, Inc. IBP: This company operates as a residential insulation installer in the United States and currently sports a Zacks Rank #1. It also has a Growth Score of A. Earnings for the current year and the next are expected to grow 20.6% and 14.7%, respectively.

Gibraltar Industries, Inc. ROCK: This company, which currently sports a Zacks Rank #1, manufactures and distributes products to the industrial and buildings market. It also has a Growth Score of A. Earnings for the current year and the next are expected to grow 19.2% and 11%, respectively.

Martin Marietta Materials, Inc. MLM: This construction aggregates producer currently sports a Zacks Rank #1. It has a Growth Score of B. Earnings for 2019 and 2020 are expected to grow 22.3% and 17.4%, respectively.

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