Back to top

Image: Bigstock

5 Stocks to Watch From a Thriving Heavy Construction Industry

Read MoreHide Full Article

The Zacks Building Products - Heavy Construction industry is poised to sustain its momentum, driven by a significant infrastructure drive led by the U.S. government. This initiative aims to bolster the nation's roads, bridges and broadband connectivity. Companies in the industry are capitalizing on increased demand across various industries, including communications, power transmission and other infrastructure projects.

Despite encountering challenges such as project delays, a competitive labor market and escalating costs, firms like EMCOR Group Inc. (EME - Free Report) , MasTec, Inc. (MTZ - Free Report) , Dycom Industries, Inc. (DY - Free Report) , Great Lakes Dredge & Dock Corp. (GLDD - Free Report) and Orion Group Holdings, Inc. (ORN - Free Report) are well-positioned to seize opportunities in the robust market landscape. While macroeconomic factors may influence some customer plans, these companies remain poised for growth in this dynamic industry.

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 the 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 the Heavy Construction Industry

U.S. Administration’s Infrastructural Endeavor: The announcement of the U.S. administration’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. The administration’s plan for accelerated investments 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. The 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. 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 and international markets.

Solid Inorganic Moves & Renewable Business Prospects: Acquisitions have been companies’ preferred mode of solidifying product portfolios and leveraging new business opportunities. Again, due to increased renewable project activity and the expansion of services in biomass and 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. The 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 macroeconomic challenges and labor availability. In addition to a tight labor market, a rise in raw material costs is a concern. 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 may dampen the near-term execution of some customer plans.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Heavy Construction industry is an 11-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 solid 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a higher earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since December 2023, the industry’s earnings estimates for 2024 have increased to $3.63 per share from $3.45.

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 Lags Sector, Outperforms the S&P 500

The Zacks Building Products - Heavy Construction industry has lagged the broader Zacks Construction sector but performed better than the Zacks S&P 500 composite over the past year.

Stocks in this industry have collectively gained 52.5% versus the broader sector’s 55.9% rally. Meanwhile, the S&P 500 has jumped 33.3% 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 20.4X versus the S&P 500’s 21X and the sector’s 18X.

Over the past five years, the industry has traded as high as 20.4X, as low as 7.5X and at a median of 13.5X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500



 

5 Heavy Construction Stocks to Watch

Here, we have discussed five stocks from the industry that have solid earnings growth potential. The chosen companies currently sport a Zacks Rank #1 (Strong Buy), or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank 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. The company has been gaining from resilient demand for its services, primarily in high-tech manufacturing, network and communications, manufacturing and industrial and healthcare and across the EV value chain, which sparked its growth momentum. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.

EMCOR, currently sporting a Zacks Rank #1, has surged 108.8% over the past year. Also, 2024 earnings estimates have increased to $13.31 per share from $12.56 over the past 30 days. Earnings for 2024 are expected to decline 0.2%. EME surpassed earnings estimates in all the trailing four quarters, with the average surprise being 28%. It carries an impressive VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum.

Price and Consensus: EME



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 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 positions the company to grow further in this pro-clean energy U.S. administration.

MasTec, currently sporting a Zacks Rank #1, has declined 0.3% over the past year. Yet, 2024 earnings estimates have increased to $2.67 per share from $2.54 over the past 30 days. Earnings for 2024 are expected to grow 35.5%. MTZ surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 1.2%. Again, it carries an impressive VGM Score of B.

Price and Consensus: MTZ



Dycom: Based in Palm Beach Gardens, FL, Dycom is a specialty contracting service provider in the United States. The company has been benefiting from the higher demand for network bandwidth and mobile broadband, extended geographic reach and proficient program management and network planning services. Yet, the increasing prices for capital equipment are causes of concern. Also, macroeconomic uncertainty may dampen its customers’ plans. Nonetheless, the prospects of the Telecommunication business look good, given the increased customer needs to expand capacity and improve the performance of existing networks, and, in certain instances, deploy new networks. Backlog ($6.917 billion) activity at the end of fiscal 2024 reflects a 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 jumped 48% over the past year. Also, fiscal 2025 earnings estimates have increased to $6.77 per share from $6.59 over the past 30 days. DY surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 53.9%. Again, it carries an impressive VGM Score of A.

Price and Consensus: DY



Great Lakes Dredge & Dock: This Houston, TX-based company provides dredging services in the United States and internationally. The company is the largest provider of dredging services in the United States. Strong domestic dredging operations, high equipment utilization and solid project execution are expected to drive growth for the company. In 2023, the U.S. Army Corps of Engineers boasted a record budget of $8.66 billion. This sparked a surge in activity within the bid market, particularly in the capital and coastal protection sectors, making 2023 a year of renewed vigor and diversity. Great Lakes remained committed to its strategic expansion into the U.S. offshore wind market, recognizing the pivotal role offshore wind will play in America's decarbonization efforts and clean energy objectives. With a focus on long-term diversification and growth opportunities, GLDD sees immense potential in offshore wind power generation. Bolstered by its extensive backlog, enhanced fleet and strategic initiatives, GLDD is optimally positioned to thrive in the flourishing dredging bid market.

Great Lakes, currently carrying a Zacks Rank #3, has jumped 66% over the past year. GLDD surpassed earnings estimates in two of the trailing three quarters but met on one occasion. Earnings for 2024 are expected to grow 314.3%. It carries an impressive VGM Score of B.

Price and Consensus: GLDD



Orion Group: This Houston, TX-based company functions as a specialized construction firm specializing in projects across building, industrial and infrastructure sectors. Their operations span the United States, Alaska, Canada and the Caribbean Basin. The backlog, which serves as a crucial metric reflecting the overall health of the business, amounted to $762.2 million as of Dec 31, 2023. Simultaneously, the company is committed to divesting its East West Jones properties in Harris County, TX, to use the proceeds to reduce debt and for general corporate purposes. This strategic move aligns with the company's focus on enhancing margins through the pursuit of higher-quality projects and improved execution.

ORN, currently carrying a Zacks Rank #3, has gained 203.6% over the past year. Earnings for 2024 are expected to grow 142.9%. Also, 2024 earnings estimates have increased to 15 cents per share from 14 cents over the past seven days. ORN surpassed earnings estimates in two of the trailing three quarters, met on one occasion and missed on another, the average surprise being 10.7%. It carries an impressive VGM Score of A.

Price and Consensus: ORN


Published in