Yahoo Finance 4 Stocks to Watch From the Prosperous Heavy Construction Industry
Higher demand from end markets like communications, transmission and power, as well as other infrastructural projects, has been benefiting the Zacks Building Products - Heavy Construction industry. The U.S. administration’s major infrastructure initiative to improve the nation’s roads, bridges and broadband is adding to the industry’s prosperity. However, unprecedented supply-chain issues and project delays, a tight labor market, as well as rising costs, are taking a toll on the industry players. Although macroeconomic challenges may dampen some of the companies’ customers’ plans, companies like EMCOR Group Inc. EME, MasTec, Inc. MTZ, Dycom Industries, Inc. DY and Granite Construction Incorporated GVA have been navigating the headwinds well and are set to benefit from solid market prospects.
Industry Description
The Zacks Building Products - Heavy Construction industry consists of mechanical and electrical construction, industrial and energy infrastructure as well as building service providers. This industry comprises heavy civil construction companies that specialize in the building and reconstruction of transportation projects, including highways, roads, bridges, airfields, ports and light rail. The companies serve commercial, industrial, utility and institutional clients. The industry players are engaged in engineering, construction and maintenance of communications infrastructure, oil and natural gas pipelines as well as processing facilities for energy and utility industries. These firms are also engaged in mining and dredging services in the United States and internationally.
4 Trends Shaping the Future of Heavy Construction Industry
U.S. Administration’s Infrastructural Endeavor: The announcement of President Joe Biden’s massive infrastructure plan to build modern sustainable infrastructure and a clean future will have major implications for the U.S. economy and the construction industry over the next five years. Biden’s plan for accelerated investment in far-reaching areas, from roads and bridges to green spaces, water systems, electricity grids as well as universal broadband, laid a new foundation for sustainable growth, withstanding the impacts of climate change and improving public health, including access to clean air and clean water. The aforesaid infrastructural expansion plan should be a boon for construction-related companies.
Strong Prospects in Telecommunication: The ramp-up of projects related to 5G has been a silver lining for the industry players. Increased demand from telecom customers for wireline networks, wireless/wireline converged networks and wireless networks using 5G technologies has been benefiting industry players. Construction work for communications is expected to pick up on huge investments in network expansion. The proliferation of smartphones should drive demand for network bandwidth and mobile broadband. Also, the industry is poised to gain from a significant number of project awards across multiple segments, including communications, health care, transmission and power, along with infrastructural projects in domestic as well as international markets.
Solid Inorganic Moves & Renewable Business Prospects: Acquisitions have been companies’ preferred mode of solidifying product portfolios and leveraging new business opportunities. Again, owing to increased renewable project activity and expansion of services in biomass as well as other smaller production facilities, the power generation and industrial construction market is poised to see sizable growth. The companies are well positioned to gain from the renewable energy drive of the pro-environmental Biden administration. Development and deployment of technology solutions across the full spectrum of decarbonization efforts, comprising all facets of infrastructure for providing carbon-free energy solutions, should benefit the companies going forward.
Macroeconomic Challenges: The biggest headwinds for the industry players are currently centered around the COVID-19 pandemic, labor availability and supply-chain delays. In addition to a tight labor market, a rise in raw material costs has been making things worse. Meanwhile, the businesses of the industry players are susceptible to the cyclical nature of the markets in which clients operate and are dependent on the timing and funding of new awards. Hence, volatility in credits and operating risks associated with economic down-cycles are pressing concerns. Macroeconomic effects and supply constraints may dampen the near-term execution of some customer plans.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Heavy Construction industry is a 10-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #65, which places it in the top 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector & S&P 500
The Zacks Building Products - Heavy Construction industry has outperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively gained 9.6% versus the broader sector’s 5.1% rise. Meanwhile, the S&P 500 has slipped 6.3% in the said period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing heavy construction stocks, the industry is currently trading at 13.3X versus the S&P 500’s 18.6X and the sector’s 14.9X.
Over the past five years, the industry has traded as high as 18.1X, as low as 7.5X and at a median of 13.2X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 Heavy Construction Stocks to Watch
Below, we have discussed four stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
EMCOR Group: Headquartered in Norwalk, CT, this company provides electrical and mechanical construction, and facilities services in the United States. EMCOR has been benefiting from solid execution in the U.S. Construction segment — comprising the U.S. Mechanical and Electrical Construction units — as well as disciplined cost control, project execution strategies and acquisition policies. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.
EMCOR, currently carrying a Zacks Rank #2, has gained 33.8% over the past year. Also, 2023 and 2024 earnings estimates have increased to $9.09 and $10.35 per share from $9.04 and $9.88 , respectively, over the past 60 days. Earnings for 2023 and 2024 are expected to grow 12.2% and 13.9%, respectively. EME surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 5.5%. It carries an impressive VGM Score of A.
Price and Consensus: EME
Granite Construction: Based in Watsonville, CA, this company is an infrastructure contractor and a construction materials producer in the United States. Overall, a robust market environment has been driving improved profitability across its businesses. Its sufficient liquidity position has enabled the company to opportunistically invest in its vertically integrated operations through organic investment and bolt-on acquisitions.
GVA, currently carrying a Zacks Rank #3, has gained 20.4% over the past year, well above the industry’s rise. Earnings for 2023 and 2024 are expected to grow 28.1% and 36.5%, respectively. GVA surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 13.4%. It carries an impressive VGM Score of B.
Price and Consensus: GVA
Dycom: Based in Palm Beach Gardens, FL, Dycom is a specialty contracting service provider in the United States. The company has been benefiting from higher demand for network bandwidth and mobile broadband, extended geographic reach as well as proficient program management and network planning services. Yet, persistent challenges associated with the automotive and equipment supply chain are causes of concern. Also, macroeconomic uncertainty has been dampening some of its customers’ plans. Nonetheless, the prospects of the Telecommunication business look good, given the increased customer need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks. Backlog ($6.141 billion) activity at the end of fourth-quarter fiscal 2023 reflects solid performance, with the booking of new work and renewing existing work. Dycom expects considerable opportunities across an array of customers.
Dycom, currently carrying a Zacks Rank #3, has lost 0.9% over the past year, underperforming the industry. That said, earnings per share for fiscal 2024 and 2025 are expected to grow 10.7% and 24.5%, respectively. DY surpassed earnings estimates in all of the trailing four quarters, with the average surprise being 207.9%. It carries an impressive VGM Score of A.
Price and Consensus: DY
MasTec: Based in Coral Gables, FL, this is a leading infrastructure construction company operating mainly throughout North America. MasTec has been benefiting from solid performance across the non-Oil and Gas business, diversified business, strong backlog, and recent acquisitions. It is one of the largest clean energy contractors in the country. Its expertise in constructing wind farms, solar farms, biomass facilities, high-voltage transmission lines, substations, battery storage and hydrogen-enabled solutions uniquely positions the company to grow further in this pro-clean energy Biden’s administration.
MasTec, currently carrying a Zacks Rank #3, has gained 12.2% over the past year, outperforming the industry. The earnings for 2023 and 2024 are expected to increase 56.1% and 33.1%, respectively. MTZ surpassed earnings estimates in all of the trailing four quarters, with the average surprise being 21.2%. It carries an impressive VGM Score of B.
Price and Consensus: MTZ
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EMCOR Group, Inc. (EME) : Free Stock Analysis Report
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Granite Construction Incorporated (GVA) : Free Stock Analysis Report
