It’s a Good Time to Own Construction Stocks
May 20, 2018
Market bias has recently shifted toward FOMO (or the “fear of missing out”) and away from “fear of losing everything.” But there are still some up-and-down sessions that make it clear that the rally lacks some oomph with the market in between catalysts right now.
A lot of the most important economic data is behind us for the moment and earnings are winding down. Plus, the next monthly jobs report is still a couple of weeks away. Investors may be looking for a catalyst, but make no mistake, the U.S. economy continues to fire on all cylinders.
I like a lot of the trends in America right now, specifically the ones I’m seeing in construction. I expect them to continue, although issues such as lumber prices and worker shortages could create inconsistent results for companies focused solely on residential projects.
Meanwhile, non-residential construction spending accounted for $450.7 million in March, and there are segments that should actually pick up momentum. Power is huge, and even if its growth is flat, any business that brings in $90 billion monthly is a great one to have exposure to.
Commercial is the second-largest segment at $87 billion, and it grew 7.3% year-over-year. Transportation is smaller, but it still enjoyed 38% growth last year.
How to Play the Trend
I think the stock that best allows us to capitalize on this upside is Jacobs Engineering (JEC). It’s one of the largest and most diverse providers of construction services, with more than 230 locations around the world. It recently acquired highly-regarded international engineering firm CH2M.
In the latest earnings report, JEC blew away the Street while at the same time offering strong guidance. There was strength in each of its business units – Aerospace, Technology, Environment and Nuclear saw revenue increase to $1.11 billion from $602 million; Buildings, Infrastructure and Advanced Facilities was up to $1.76 billion from $897.8 million; and Energy, Chemicals and Resources grew to $1.07 billion from $802.7 million – and operating margins also saw great improvement. The building segment’s margins were up to 7.8% from 7.1% while the energy segment’s increased to 5.3% from 5.1%.
The stock has been choppy for much of this year so far, but it recently rallied to recapture all three of its major moving averages. I see it climbing to new highs in the second half of 2018.
Another name I like now and have for a long time is Mastec (MTZ), an infrastructure engineering and construction company. It’s a great proxy for construction in the United States and has been firing on all cylinders recently. Execution is amazing, and guidance suggests the momentum will continue.
MTZ is cheap right now as it currently changes hands with a PEG ratio of only 0.7 and a forward P/E of 12.4. I think it eventually rallies to $70, which represents 40% upside from today’s prices.
There are a lot of great opportunities out there in today’s environment, and I’m ready and waiting to pounce as soon as I have the chance. I hope you are, too.