A rebound in the residential market and increased public sector construction activity are expected to brighten up the fourth-quarter earnings picture for the construction sector. Factors like a solid jobs market, modest rise in material costs and a benign rate environment are expected to have lent support to the industry players.
The overall estimate picture is a heartening one for the construction sector. Per the latest Earnings Outlook, construction sector earnings are expected to grow 7.6% in the fourth quarter, compared with 7.2% growth in the third. Revenues are projected to increase 3.3% versus 2.5% growth in Q3.
So far, the fourth-quarter 2019 results of sector heavyweights like Lennar Corporation (LEN - Free Report) and United Rentals, Inc. (URI - Free Report) have been encouraging. Lennar reported better-than-expected results, marking the third straight quarter of an earnings beat. United Rentals also came up with earnings and revenue beats for fourth-quarter 2019, aided by improved demand in construction end-markets. It also issued a strong full-year 2020 guidance. However, Fastenal Company’s (FAST - Free Report) fourth-quarter top and bottom lines missed the Zacks Consensus Estimate due to continued slowdown in activity levels.
What’s Working in Favor?
Improvement in homebuilding and government projects is expected to have benefited construction companies in the December quarter. The U.S. residential market has been experiencing a profitable stretch, courtesy of favorable mortgage rates and a healthy jobs market. The companies are expected to have gained from continuous focus on driving demand for entry-level homes and addressing the need for lower-priced homes, given the affordability concerns. Notably, lower mortgage rates, reduced construction costs, low unemployment and rising wages are expected to have somewhat offset headwinds like rising land and labor costs as well as shortage of home supply. Record low inventory level continues to be a potent headwind that is deterring prospective buyers, especially first-timers.
Apart from residential industry players, construction companies are expected to come up with a strong fourth-quarter 2019 show, driven by growth in public sector construction activity, mainly in large transportation projects and contract work for highways. A significant number of project awards across multiple segments, including communications, transmission and power, and infrastructural projects in domestic as well as international markets along with strong pricing are likely to have contributed to growth. Again, increasing defense spending in major economies like the United States, rising public investment in water infrastructure and utility plants as well as encouraging prospects in the healthcare market have likely acted in favor.
Which Are the Right Picks?
Despite higher input costs and trade tensions, the construction space looks attractive on solid infrastructure activity, consistent job growth and Fed’s dovish stance.
Given the headwinds, it is not easy to find stocks with the potential to trump earnings estimates. Here, the Zacks methodology comes in handy as it helps identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.
One can trim down the list with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.
Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
For investors willing to adopt this strategy, we have highlighted five construction stocks that may stand out this earnings season.
Our first choice is Boise Cascade Company (BCC - Free Report) — a manufacturer and distributer of wood products and building materials in the United States and Canada. The company topped earnings estimates in two of the trailing four quarters.
Though the company missed earnings estimates in third-quarter 2019 by 4%, it looks poised to beat expectations for the fourth quarter. The company carries a Zacks Rank #2 and has an Earnings ESP of +56.52%. The Zacks Consensus Estimate for its earnings per share is pegged at 23 cents, suggesting a 182.1% year-over-year increase. You can see the complete list of today’s Zacks #1 Rank stocks here.
Although seasonally slower demand growth for products are likely to have been a bother, its bolt-on acquisitions and internal growth initiatives along with favorable housing market dynamics are expected to show on its fourth-quarter results.
Next in line is North American Construction Group Ltd. (NOA - Free Report) — a provider of mining and heavy construction services to resource development and industrial construction sectors in Canada.
The company surpassed earnings estimates in the trailing four quarters, the average positive surprise being 8.5%. The company is likely to beat expectations for the soon-to-be-reported quarter as well. The company carries a Zacks Rank #2 and has an Earnings ESP of +14.29%. The Zacks Consensus Estimate for its earnings per share is pinned at 32 cents, indicating an increase of 300% year over year.
Increased infrastructural spending by federal and provincial governments, large earthwork projects (namely P3, flood diversion and road building) along with development and civil earthworks construction for greenfield and expanding sites are likely to have aided the company’s fourth-quarter performance. Additionally, improved planning and minimal unnecessary downtime, less ad hoc activities on-site related to movement of personnel and equipment, and most importantly, improved scheduling of heavy equipment maintenance are likely to have resulted in margin improvement in the quarter.
We are also counting on Installed Building Products, Inc. (IBP - Free Report) , which operates as a residential insulation installer in the United States. The company topped earnings estimates in the last reported quarter by 15.1% and is poised to beat expectations when it reports fourth-quarter 2019 results. The company beat earnings estimates in all of the last four quarters, the average beat being 9.2%.
For the upcoming release, Installed Building Products has a Zacks Rank #2 and an Earnings ESP +3.09%. The Zacks Consensus Estimate for its earnings per share is pegged at 86 cents.
The company’s fourth-quarter results are likely to have benefited from favorable pricing trends, stable end-market demand, and benefits from geographic and product diversification strategies.
Another compelling pick is PotlatchDeltic Corporation (PCH - Free Report) — a leading Real Estate Investment Trust (REIT). The company topped earnings estimates in third-quarter 2019 by 11.1% and looks poised to beat expectations for the fourth quarter as well, when it reports on Feb 3. The company beat earnings estimates in the last four quarters, the average beat being 44%.
For the upcoming release, PotlatchDeltic has a Zacks Rank #2 and an Earnings ESP +15.00%. The Zacks Consensus Estimate for its earnings per share is pegged at 10 cents, calling for an increase of 150% year over year.
Improved U.S. housing market fundamentals and increased capital project are likely to have aided PotlatchDeltic’s fourth-quarter performance.
The final name on our list is Aspen Aerogels, Inc. (ASPN - Free Report) , an aerogel technology company. The company topped earnings estimates in the last reported quarter by 18.2% and is poised to beat expectations when it reports fourth-quarter 2019 results on Feb 20.
The company carries a Zacks Rank #3 and has an Earnings ESP of +25.00%. The Zacks Consensus Estimate for its earnings per share is pegged at a loss of 4 cents, suggesting an improvement from the year-ago loss of 35 cents.
Higher demand in its core North American petrochemical and refinery markets and continued shipments to the PTT LNG Nong Fab receiving terminal project are expected to have helped the company register growth in earnings and revenues. Also, a significant backlog of project work along with sustained focus to bring down raw material costs should have helped expand margins.
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