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Arcosa (ACA) Looks Attractive Now: What's Driving the Stock?

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Arcosa, Inc. (ACA - Free Report) has been riding high on strength in the infrastructure market, successful implementation of lean manufacturing initiatives and solid buyout strategy. Notably, increased order activity in Energy Equipment and barge businesses are raising production visibility for 2020.

Meanwhile, shares of this infrastructure-related products and solutions provider have jumped 54% over a year compared with the Zacks Building Products - Miscellaneous industry’s 36.4% rally. This bull run is likely to continue throughout the year as the company has an impressive earnings growth rate and solid fundamentals.

Notably, its earnings are expected to grow 14.5% in 2020. On a further encouraging note, Arcosa is expected to register 12.6% earnings growth in three-five years. Markedly, the company has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in each of the trailing three quarters, with an average surprise of 57.9%.

Let’s delve deeper into the factors that are substantiating growth of the Zacks Rank #1 (Strong Buy) company. You can see the complete list of today’s Zacks #1 Rank stocks here.

Strong Performance & Upbeat View

Arcosa has been generating solid earnings and revenue growth over the last few quarters, post the separation from Trinity Industries, Inc. in November 2018. In the last three quarters, its sales and adjusted earnings per share grew 18.8% and 35.2%, respectively. Also, adjusted EBITDA margin expanded 150 basis points (bps) from the corresponding period of 2018.

Backed by faster-than-expected improvement in Energy Equipment margins, continued confidence in the health of Construction Products markets and a barge ramp up, the company raised its full-year 2019 adjusted EBITDA guidance during second-quarter 2019. In fact, the company expects the metric to be at the higher end of the targeted range of $230-$240 million, indicating a significant improvement from the 2018 reported figure of $186.5 million. Adjusted EBITDA margin is expected between 13.1% and 13.3%, suggesting a notable improvement from the 2018 reported figure of 12.8%.

Net sales are expected within $1.75-$1.80 billion, indicating 19.9-23.3% growth from 2018. Meanwhile, the Zacks Consensus Estimate for 2019 earnings has been upwardly revised by 0.9% to $2.28 per share in the past 60 days, indicating 25.3% year-over-year growth.

Strategic Initiatives

During third-quarter 2019, Arcosa completed two bolt-on acquisitions. Notably, the ACG acquisition in December 2018 added to the company’s strength. The firm has been working hard to diversify its customer base and expand product portfolio through acquisitions.

The company also undertook lean improvement initiatives. Its wind towers and utility structures businesses achieved higher volumes during third-quarter 2019 as a result of the initiatives and healthy market demand. Notably, its Energy Equipment segment reported strong backlog numbers, providing strong visibility for continued progress in 2020.

Strong Diversified Business

Arcosa operates three business segments namely, Construction Products Group, Energy Equipment Group and Transportation Products Group. All the three businesses came up with solid top-line numbers in the first nine months of 2019. The company believes strong segmental performance to bolster profitability going forward.

Construction Products Group, which accounted for approximately 48% of total third-quarter 2019 net sales, recorded 48.9% net sales growth in the first nine months of 2019. The upside was primarily driven by the acquisition of ACG, partially offset by weather-driven volume declines in legacy businesses.

Energy Equipment Group registered 8.8% revenue growth with 600-bps improvement in adjusted EBITDA margin during the same period. The upside was backed by higher volumes in wind towers and utility structures businesses, healthy market demand, along with improved pricing.

In Transportation Products Group, revenues grew 15.2% year over year, driven by higher tank barge deliveries, partially offset by decreased deliveries and lower contractual pricing for steel components. Particularly, barge revenues were up nearly 57% year over year, backed by higher tank barge deliveries.

Solid VGM Score

Arcosa has a solid VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B, when combined with a Zacks Rank #1 or 2 (Buy), make solid investment choices.

Meanwhile, the company — which shares space with Installed Building Products, Inc. (IBP - Free Report) , TopBuild Corp. (BLD - Free Report) and Armstrong World Industries, Inc. (AWI - Free Report) in the industry — is a great pick in terms of growth investment, supported by a Growth Score of A. Also, Arcosa would be a good pick for value investors, as it has a Value Score of B.

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