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Quanta Services or AECOM: Which Construction Stock to Bet On?

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Undeniably, construction industry is gradually gaining steam, given recovery in the housing market and increased focus on fixing the country’s infrastructure. Notably, U.S. construction spending inched up in September, backed by government and private residential projects, per the latest report from the U.S. Census Bureau.

Solid construction activities in the public sector, low interest/mortgage rates, a solid job market and rising wages have helped the Zacks Construction sector to gain 39.2% so far this year, outperforming the broader market’s (S&P 500) 22.8% rally.

Given this backdrop, construction stocks could offer a safe haven to investors because of their stability and the fact that these are fundamentally strong enough to withstand industry woes.

Here, we focus on two companies from the Zacks Engineering - R&D Services industry falling under the broader Construction space — Quanta Services, Inc. (PWR - Free Report) and AECOM (ACM - Free Report) . At present, market capitalization of Quanta Services is $6.01 billion, while that of AECOM stands at $6.7 billion.

Before drawing a head-to-head comparison between Quanta Services and AECOM, let’s check out a few key statistics of the companies.

YTD Stock Performance

AECOM and Quanta Services, which share space with Jacobs Engineering Group Inc. (JEC - Free Report) and Gates Industrial Corporation PLC (GTES - Free Report) in the same industry, have gained 60.1% and 38.7%, respectively, so far this year. The Engineering - R&D Services industry has gained 39.2% during the period. Hence, AECOM fared much better than Quanta Services in this parameter.

 

Valuation

The industry is clearly undervalued compared with the S&P 500, with respect to forward 12-month price-to-earnings (P/E) ratio. This implies that the industry has upside potential for the near future. The industry has an average forward 12-month P/E ratio — which is the best multiple for valuing Engineering - R&D Services stocks — of 14, which is below the S&P 500’s average of 17.9. Hence, it might be a good idea to focus on stocks belonging to this particular industry.

Coming to the two stocks under consideration, AECOM — with a 12-month forward P/E ratio of 12.6 — is undervalued than the S&P 500 and the industry. Quanta Services, with a 12-month forward P/E ratio of 10.9, is also less pricey than both the S&P 500 and the industry.

Comparing the two stocks, Quanta Services is less pricey than AECOM.

Earnings Growth Projections & Surprises

Analysts expect AECOM’s earnings to grow at a 9.3% rate over the next three-five years. Comparatively, Quanta Services’ earnings are expected to grow 14.5% over the same time frame. Hence, Quanta Services’ higher growth rate implies greater potential for capital appreciation.

AECOM and Quanta Services’ year-over-year earnings growth is expected to be 20.4% and 20.7%, respectively, in 2020.

Hence, Quanta Services is a clear winner in terms of earnings growth expectation.

Meanwhile, considering a more comprehensive earnings history, both AECOM and Quanta Services surpassed estimates thrice in the last four quarters. That said, AECOM has a superior average positive earnings surprise of 4.94% than Quanta Services’ negative surprise of 9.09% in the said period.

Profitability and Returns

Profitability and returns are a measure of the quality of a company’s business and growth opportunities. Return on Capital (ROC) of AECOM is 5.6%, while that of Quanta Services and the industry is 8.6% and 9.9%, respectively. This signifies that Quanta Services’ business generates a higher return on investment than AECOM’s.

Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12 months for AECOM and Quanta Services is 10.3% and 12.2%, respectively. While Quanta Services has outpaced the industry level of 10.5%, AECOM has failed to surpass the same in the said period.

Zacks Rank

While Quanta Services sports a Zacks Rank #1 (Strong Buy), AECOM carries a Zacks Rank #2 (Buy). The Zacks Engineering – R&D Services industry currently carries a Zacks Industry Rank #67, which places it at the top 26% of more than 250 Zacks industries.

Favorable infrastructure spending and a strong job market have been driving the performance of engineering, procurement and construction services providers from the Construction space.

The Verdict

Quanta Services appears to be a comparatively better investment option than AECOM in terms of earnings growth expectation, ROE, ROC, Zacks Rank and valuation. You can see the complete list of today’s Zacks #1 Rank stocks here.

However, AECOM holds an advantage when it comes to price performance. Overall, our comparative analysis shows that Quanta Services has an edge over AECOM.

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