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5 Construction Stocks with Strong Upside Potential
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Construction stocks are up 14.4% so far this year. Yet there is reason to believe that there is further upside in the cards.
It isn’t that the impending economic slowdown won’t have an impact, however. After all, more than half the companies are either exposed to home construction, or directly involved in it. Therefore, interest rates, mortgage rates, household savings, disposable income and such things will of course have an impact.
But the unemployment rate has ranged between 3.4% and 3.7% from Mar 2022 to Mar 2023 and any number below 5% is considered full employment. Moreover, consumer confidence actually improved in April. The percentage of consumers surveyed that think business conditions are good is more than the percentage thinking that they’re bad and the second group has seen a nice decline even from last month. Similarly, those thinking that jobs were plentiful were nearly 4x those that said they weren’t, with the second group down slightly from last month.
The collapse of Silicon Valley Bank and Signature Bank had a ripple effect on the housing market, which sparked fresh concerns about the stability of the U.S. economy. This, in turn, brought down mortgage rates. With the Fed raising rates last week, the interest rate on a 30-year mortgage rose from 6.52% to 6.58%. This may be considered a negative. But the fact that this is expected to be the last hike this time around should be viewed as positive.
The 5.1% drop in energy prices was the bright spot in the CPI numbers released on May 10. Although food prices increased 7.7% from last year, overall inflation rose to 4.9%. Inflation excluding food and energy was 5.5%, driven by the usual culprits transportation and shelter. The bottom line is that unless you’re looking to travel or buy a home, you’re seeing some benefit at the pump and at home that’s somewhat offsetting the pain in food cost inflation.
That means housing remains an attractive market for investors, as inventories although improving over the past year are still not at the level where prices could start to come down, especially in the affordable segment.
The biggest positive on the non-residential side is the U.S. government’s commitment to infrastructure improvements that will boost demand for civil and infrastructure work. These types of projects typically generate stable revenue and are longer-term, providing a level of stability for contractors and suppliers.
In commercial, the dynamics are more complicated. Large commercial projects like malls are no longer viable because of declining traffic. However, some of these are being converted for other purposes, which will generate some revenue. Additionally, a ResearchAndMarkets report mentions delays in hyper-scale data center construction projects in 2023 as a result of the economic impact on tech players.
Moreover, according to the Wells Fargo 2023 Construction Industry Forecast, there is "cautious optimism" among non-residential contractors and distributors. The survey shows that while more than 50% of contractors expect to rent the same amount of heavy construction equipment in 2023, this could vary depending on the level of demand and product prices. Distributors on the other hand are renting the same or more equipment than last year, and their fleet utilization is around 70%.
The industry is expected to expand 6.1% this year and at a compound annual growth rate of 5.2% from 2023 through 2027, according to the ResearchAndMarkets report.
All things considered, this sector is one of the better places to put your money. So here are a few stocks that you may want to add to your portfolio based on their growth prospects, as reflected in analyst estimate revisions:
Headquartered in Raleigh, North Carolina, Martin Marietta, a natural resource-based building materials company, supplies aggregates and other building materials to residential and non-residential construction, as well as railroad, agricultural, utility and environmental industries. It offers crushed stone, sand and gravel products; ready mixed concrete and asphalt; paving products and services; and Portland and specialty cement.
The company also produces magnesia-based chemicals products; dolomitic lime primarily to customers for steel production and soil stabilization; and cement treated materials. Its chemical products are used in flame retardants, wastewater treatment, pulp and paper production, and other environmental applications.
Analysts are upbeat about this Zacks Rank #1 (Strong Buy) stock. They’ve taken its 2023 earnings estimate up 6.7% and 2024 estimate up 6.3% in the last 30 days. Revenue for the two years is expected to increase a respective 18.0% and 8.5%. Earnings are expected to increase 31.2% in 2023 and 14.4%, respectively.
PGT Innovations, Inc.
North Venice, Florida-based PGT is a company that produces and distributes impact-resistant aluminum frame windows and doors for residential and commercial use. These products are designed to withstand hurricane-force winds and wind-borne debris.
The company also offers non-impact-resistant options with insulating glass for different climate zones as well as customizable options for aluminum frame windows and doors, porch enclosures, sliding glass and terrace doors, fixed windows and more. PGT Innovations serves window distributors, building supply distributors and garage door installation dealers.
This Zacks Rank #1 stock has seen positively viewed by analysts who have increased their estimates for 2023 by 4.1% and for 2024 by 10.2% in the past 30 days. While revenue growth for the next two years is anticipated to be -0.4% and 3.8%, respectively, earnings growth is expected to be -8.3% in 2023 and 16.3% in 2024.
North American Construction Group Ltd. (NOA - Free Report)
Acheson, Canada-based North American Construction Group provides equipment maintenance, and mining and heavy construction services to resource development and industrial construction markets in Canada, the U.S. and Australia. Its range of services including constructability reviews, budgetary cost estimates, design-build construction, project management, contract mining, etc. as well as equipment maintenance. As of December 31, 2022, the company operated a heavy equipment fleet of 637 units.
Over the past 30 days, analysts have significantly increased their estimates for this Zacks Rank #1 stock. Its 2023 estimate has been raised by 5.6%, while its 2024 estimate has been raised by 4.8%. The current projections indicate a growth of 7.6% and 1.1% in revenue and earnings, respectively, for 2023. For 2024, revenue and earnings are expected to grow by 2.7% and 4.6%, respectively.
Birmingham, Alabama-based Vulcan Materials Company produces and supplies construction aggregates (crushed stones, sand and gravel, sand, related services, etc), asphalt mix, asphalt construction paving, ready-mix concrete for highway construction and maintenance, streets, other public works, as well as for the construction of housing and commercial, industrial and other nonresidential facilities. In addition, it mines, produces and sells calcium products for animal feed, plastics and water treatment industries.
This Zacks Rank #1 stock has seen an 8.5% increase in both its 2023 and 2024 earnings estimates. Analysts currently estimate that its 2023 revenue and earnings will grow 5.7% and 25.2%, respectively while 2024 revenue and earnings will grow 8.1% and 19.6%, respectively.
Miami, Florida-based Watsco is a distributor of air conditioning, heating and refrigeration equipment and related parts and supplies. Its product offerings include residential and commercial air conditioning and heating equipment, replacement compressors, motors, refrigerants, ductwork, plumbing and bathroom remodeling supplies. The company primarily serves contractors and dealers in the replacement and new construction markets for residential and light commercial central air conditioning, heating and refrigeration systems.
The last 30 days have seen a 5.2% increase in the 2023 earnings estimate and a 2.6% increase in the 2024 estimate. At the current level, they represent earnings growth of 2.1% in 2023 and 1.7% in 2024. Revenue growth is expected to be 3.1% in 2023 and 2.7% in 2024. The shares carry a Zacks Rank #1.
Year-to-Date Price Performance
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5 Construction Stocks with Strong Upside Potential
Construction stocks are up 14.4% so far this year. Yet there is reason to believe that there is further upside in the cards.
It isn’t that the impending economic slowdown won’t have an impact, however. After all, more than half the companies are either exposed to home construction, or directly involved in it. Therefore, interest rates, mortgage rates, household savings, disposable income and such things will of course have an impact.
But the unemployment rate has ranged between 3.4% and 3.7% from Mar 2022 to Mar 2023 and any number below 5% is considered full employment. Moreover, consumer confidence actually improved in April. The percentage of consumers surveyed that think business conditions are good is more than the percentage thinking that they’re bad and the second group has seen a nice decline even from last month. Similarly, those thinking that jobs were plentiful were nearly 4x those that said they weren’t, with the second group down slightly from last month.
The collapse of Silicon Valley Bank and Signature Bank had a ripple effect on the housing market, which sparked fresh concerns about the stability of the U.S. economy. This, in turn, brought down mortgage rates. With the Fed raising rates last week, the interest rate on a 30-year mortgage rose from 6.52% to 6.58%. This may be considered a negative. But the fact that this is expected to be the last hike this time around should be viewed as positive.
The 5.1% drop in energy prices was the bright spot in the CPI numbers released on May 10. Although food prices increased 7.7% from last year, overall inflation rose to 4.9%. Inflation excluding food and energy was 5.5%, driven by the usual culprits transportation and shelter. The bottom line is that unless you’re looking to travel or buy a home, you’re seeing some benefit at the pump and at home that’s somewhat offsetting the pain in food cost inflation.
That means housing remains an attractive market for investors, as inventories although improving over the past year are still not at the level where prices could start to come down, especially in the affordable segment.
The biggest positive on the non-residential side is the U.S. government’s commitment to infrastructure improvements that will boost demand for civil and infrastructure work. These types of projects typically generate stable revenue and are longer-term, providing a level of stability for contractors and suppliers.
In commercial, the dynamics are more complicated. Large commercial projects like malls are no longer viable because of declining traffic. However, some of these are being converted for other purposes, which will generate some revenue. Additionally, a ResearchAndMarkets report mentions delays in hyper-scale data center construction projects in 2023 as a result of the economic impact on tech players.
Moreover, according to the Wells Fargo 2023 Construction Industry Forecast, there is "cautious optimism" among non-residential contractors and distributors. The survey shows that while more than 50% of contractors expect to rent the same amount of heavy construction equipment in 2023, this could vary depending on the level of demand and product prices. Distributors on the other hand are renting the same or more equipment than last year, and their fleet utilization is around 70%.
The industry is expected to expand 6.1% this year and at a compound annual growth rate of 5.2% from 2023 through 2027, according to the ResearchAndMarkets report.
All things considered, this sector is one of the better places to put your money. So here are a few stocks that you may want to add to your portfolio based on their growth prospects, as reflected in analyst estimate revisions:
Martin Marietta Materials, Inc. (MLM - Free Report)
Headquartered in Raleigh, North Carolina, Martin Marietta, a natural resource-based building materials company, supplies aggregates and other building materials to residential and non-residential construction, as well as railroad, agricultural, utility and environmental industries. It offers crushed stone, sand and gravel products; ready mixed concrete and asphalt; paving products and services; and Portland and specialty cement.
The company also produces magnesia-based chemicals products; dolomitic lime primarily to customers for steel production and soil stabilization; and cement treated materials. Its chemical products are used in flame retardants, wastewater treatment, pulp and paper production, and other environmental applications.
Analysts are upbeat about this Zacks Rank #1 (Strong Buy) stock. They’ve taken its 2023 earnings estimate up 6.7% and 2024 estimate up 6.3% in the last 30 days. Revenue for the two years is expected to increase a respective 18.0% and 8.5%. Earnings are expected to increase 31.2% in 2023 and 14.4%, respectively.
PGT Innovations, Inc.
North Venice, Florida-based PGT is a company that produces and distributes impact-resistant aluminum frame windows and doors for residential and commercial use. These products are designed to withstand hurricane-force winds and wind-borne debris.
The company also offers non-impact-resistant options with insulating glass for different climate zones as well as customizable options for aluminum frame windows and doors, porch enclosures, sliding glass and terrace doors, fixed windows and more. PGT Innovations serves window distributors, building supply distributors and garage door installation dealers.
This Zacks Rank #1 stock has seen positively viewed by analysts who have increased their estimates for 2023 by 4.1% and for 2024 by 10.2% in the past 30 days. While revenue growth for the next two years is anticipated to be -0.4% and 3.8%, respectively, earnings growth is expected to be -8.3% in 2023 and 16.3% in 2024.
North American Construction Group Ltd. (NOA - Free Report)
Acheson, Canada-based North American Construction Group provides equipment maintenance, and mining and heavy construction services to resource development and industrial construction markets in Canada, the U.S. and Australia. Its range of services including constructability reviews, budgetary cost estimates, design-build construction, project management, contract mining, etc. as well as equipment maintenance. As of December 31, 2022, the company operated a heavy equipment fleet of 637 units.
Over the past 30 days, analysts have significantly increased their estimates for this Zacks Rank #1 stock. Its 2023 estimate has been raised by 5.6%, while its 2024 estimate has been raised by 4.8%. The current projections indicate a growth of 7.6% and 1.1% in revenue and earnings, respectively, for 2023. For 2024, revenue and earnings are expected to grow by 2.7% and 4.6%, respectively.
Vulcan Materials Company (VMC - Free Report)
Birmingham, Alabama-based Vulcan Materials Company produces and supplies construction aggregates (crushed stones, sand and gravel, sand, related services, etc), asphalt mix, asphalt construction paving, ready-mix concrete for highway construction and maintenance, streets, other public works, as well as for the construction of housing and commercial, industrial and other nonresidential facilities. In addition, it mines, produces and sells calcium products for animal feed, plastics and water treatment industries.
This Zacks Rank #1 stock has seen an 8.5% increase in both its 2023 and 2024 earnings estimates. Analysts currently estimate that its 2023 revenue and earnings will grow 5.7% and 25.2%, respectively while 2024 revenue and earnings will grow 8.1% and 19.6%, respectively.
Watsco, Inc. (WSO - Free Report)
Miami, Florida-based Watsco is a distributor of air conditioning, heating and refrigeration equipment and related parts and supplies. Its product offerings include residential and commercial air conditioning and heating equipment, replacement compressors, motors, refrigerants, ductwork, plumbing and bathroom remodeling supplies. The company primarily serves contractors and dealers in the replacement and new construction markets for residential and light commercial central air conditioning, heating and refrigeration systems.
The last 30 days have seen a 5.2% increase in the 2023 earnings estimate and a 2.6% increase in the 2024 estimate. At the current level, they represent earnings growth of 2.1% in 2023 and 1.7% in 2024. Revenue growth is expected to be 3.1% in 2023 and 2.7% in 2024. The shares carry a Zacks Rank #1.
Year-to-Date Price Performance
Image Source: Zacks Investment Research