The construction industry had mixed results last year as large-scale business developments were put on hold due to the coronavirus pandemic. On the other hand, the industry’s residential side gained due to an increase in demand for new homes due to low mortgage rates and low inventory. This was evident from the iShares U.S. Home Construction ETF (ITB) gain of 26.4% in 2020.
The COVID vaccine has led to investor optimism for the economy and has driven up stocks to record highs. This is especially true in the construction industry. The First Trust Global Engineering and Construction ETF (FLM), which tracks stocks that are engaged in large civil and capital projects, is already up 4.7% for the year, compared to the S&P 500’s gain of 1.2%.
Dodge Data & Analytics, which tracks the construction industry, estimates that total U.S. construction starts will increase by 4% in 2021, to $771 billion. This follows a loss of 14% last year. In addition to continued residential construction, we are likely to see large scale infrastructure projects start this year. This should be favorable to companies such as Jacobs Engineering Group Inc. (J), Quanta Services (PWR), and EMCOR Group Inc. (EME).
Jacobs Engineering Group Inc. (J)
J is a global provider of engineering, design, procurement, construction, maintenance services, and cyber engineering and security solutions. The company serves industrial, commercial, and government clients in various sectors, including water, transportation, healthcare, technology, and chemicals.
The company has benefited from a series of contract wins as its backlog at the end of fiscal 2020 was $23.8 billion, which was a 5.5% increase year over year. This is due to the strong demand for J’s consulting services. In addition, J should also benefit from government programs and the continued 5G build-out in the telecommunications end market.
J is also growing through acquisitions as it acquired The Buffalo Group in November 2020. The company is a leader in advanced cyber and intelligence solutions. This should strengthen J’s portfolio of national priority government solutions in the cyber domain and Intelligence Community. In November, the company launched its Focus 2023 initiative, in which the company has been accelerating the adoption of digital technology across all its operations.
J is rated a Strong” in our POWR Ratings system. It holds a grade of “A” in Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade. Those are three out of the four components that make up the POWR Ratings. J is also the #6 ranked stock in the Industrial – Services industry.
Quanta Services, Inc. (PWR)
PWR provides specialty contracting services and infrastructure solutions for the electric power, energy, and communication industries. It designs, installs, and repairs electric power networks, renewable energy facilities, and other infrastructure systems and facilities.
The company benefits from strong spending by electric utilities on grid modernization and infrastructure hardening and by gas utilities on distribution system modernization and safety programs. The company ended the third quarter with a 12-month backlog of $8.1 billion, up from $7.6 billion a year ago. This is due to the strength of its core operations.
The company has initiated a three-pronged growth strategy, which includes focusing on timely delivery of projects, leveraging its core business to expand in complementary adjacent service lines, and the continuation of exploring new service lines. PWR is also poised to benefit from the rising demand for power transmission and pipeline projects over the next few years.
The stock is rated a “Strong Buy in our POWR Ratings system. It holds a grade of “A” in Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade. It is also the #6 ranked stock in the Industrial – Services industry.
EMCOR Group Inc. (EME)
EME is one of the largest electrical and mechanical construction and facilities services firms in the United States. It provides a wide range of services, including installing electrical distribution systems, voice and data communication systems, and environmental controls within buildings.
The company is poised to benefit from higher project activity across its U.S. Mechanical and Electrical Construction segments. Third-quarter 2020 Mechanical and Electrical Construction segments’ Total Remaining Performance Obligations increased 12.4% year over year. In the third quarter, its U.S. Construction segment’s operating margins improved 240 basis points from the last year, due to a solid cost structure and productivity levels.
EME has also grown through acquisitions. These acquisitions are targeted toward buying small private companies with proven management and expansion potential. Future opportunities will be driven by building upgrades in the commercial market and an increase in bus depots, bridges, airports, and tunnels in the transportation segment.
The stock is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” in Trade Grade, Buy & Hold Grade, and Peer Grade. It is also the #13 ranked stock in the Industrial – Services industry.
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J shares . Year-to-date, J has gained 3.72%, versus a 1.29% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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