Factors like a solid jobs market, increased infrastructural activity and a benign rate environment brighten up the third-quarter earnings picture for the construction sector.
The S&P 500 companies in more than half of the Zacks broad sectors (nine out of 16) are expected to witness a year-over-year decline in earnings in the third quarter of 2019. Nonetheless, the overall picture is a heartening one for the construction sector. Per the latest Earnings Preview, construction sector earnings are expected to grow 3.9% in the third quarter, compared with a 5.4% drop in the second. Revenues are projected to increase 1.6% (versus flat growth in Q2).
For a quick flashback, the third-quarter 2019 results of sector heavyweights like Lennar Corporation LEN and Fastenal Company FAST paint a bright picture. Lennar reported better-than-expected results in third-quarter fiscal 2019, marking two consecutive quarters of earnings beats. United Rentals, Inc. URI also came up with earnings and revenue beats for third-quarter 2019. Yet, the company narrowed its full-year guidance. Again, Fastenal reported third-quarter 2019 results, wherein the top and the bottom line surpassed the Zacks Consensus Estimate despite a slowdown in activity levels.
What’s Working in Favor?
Construction companies are expected to come up with a strong third-quarter 2019 show, attributable to 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 might have favored construction companies in the quarter.
Meanwhile, the housing market, which has borne the brunt of rising interests/mortgage rates and higher raw material costs since the end of 2017, has regained momentum on a declining mortgage rate trend. The industry players are expected to have gained from solid household formation attributable to declining mortgage/interest rates, steady economic growth and favorable demographics.
In a nutshell, the housing market rebound and Trump’s drive to enhance the country’s infrastructure by upgrading highways, railroads, bridges and broadband are expected to have benefited the players’ bottom lines in the quarter under review.
Without any doubt, construction companies have for long been grappling with trade war-driven increase in raw material costs, rising freight expenses, higher incentives to drive sales and volatility in commodity prices. These along with higher land/labor costs might have weighed on margins of many companies in the construction space, thereby hurting bottom lines to some extent.
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 Martin Marietta Materials, Inc. MLM — a producer and supplier of construction aggregates and other heavy building materials, mainly cement, in the United States. The company topped earnings estimates in two of the trailing four quarters, the average beat being 34.31%.
It looks poised to beat expectations for the third quarter as well, when it reports on Oct 29. The company carries a Zacks Rank #2 and has an Earnings ESP of +1.77%. The Zacks Consensus Estimate for its earnings per share is pegged at $3.50. You can see the complete list of today’s Zacks #1 Rank stocks here.
Martin Marietta Materials, Inc. Price and EPS Surprise
Martin Marietta Materials, Inc. price-eps-surprise | Martin Marietta Materials, Inc. Quote
Our second choice is Jacobs Engineering Group Inc. JEC — one of the leading providers of professional, technical and construction services to industrial, commercial and governmental clients. The company surpassed earnings estimates in three of the trailing four quarters, the average positive surprise being 0.71%. It looks poised to beat expectations for the soon-to-be-reported quarter as well, when it reports on Nov 25. The company carries a Zacks Rank #2 and has an Earnings ESP of +0.97%. The Zacks Consensus Estimate for its earnings per share is pinned at $1.28.
Jacobs Engineering Group Inc. Price and EPS Surprise
Jacobs Engineering Group Inc. price-eps-surprise | Jacobs Engineering Group Inc. Quote
Our third choice is MasTec, Inc. MTZ — a leading infrastructure construction company. The company topped earnings estimates in the last reported quarter by 42.9% and is poised to beat expectations when it reports third-quarter 2019 results on Oct 31.
For the upcoming release, MasTec has a Zacks Rank #1 and an Earnings ESP +0.92%. The Zacks Consensus Estimate for its earnings per share is pegged at $1.64.
MasTec, Inc. Price and EPS Surprise
MasTec, Inc. price-eps-surprise | MasTec, Inc. Quote
Our fourth choice is Masco Corporation MAS. Headquartered in Taylor, MI, Masco manufactures, sells and installs home improvement and building products. The company beat earnings estimates in two of the last four quarters, the average beat being 2.35%. It looks set to beat expectations for the third quarter as well, when it reports on Oct 30.
For the upcoming release, Masco has a Zacks Rank #3 and an Earnings ESP +0.61%. The Zacks Consensus Estimate for its earnings per share is pegged at 71 cents.
Masco Corporation Price and EPS Surprise
Masco Corporation price-eps-surprise | Masco Corporation Quote
Our final choice is KBR, Inc. KBR, a leading global engineering, construction and service company. It topped earnings estimates in the trailing four quarters, the average beat being 8.74%.
It looks poised to beat expectations for the third quarter as well, when it reports on Oct 30. The company carries a Zacks Rank #3 and has an Earnings ESP of +0.38%. The Zacks Consensus Estimate for its earnings per share is pegged at 44 cents.
KBR, Inc. Price and EPS Surprise
KBR, Inc. price-eps-surprise | KBR, Inc. Quote
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