Persistent supply-chain bottlenecks, rising mortgage rates, higher home prices, labor market constraints and inflationary pressure are expected to have weighed on the Construction sector in the second quarter of 2022. Yet, improvement in manufacturing and infrastructural activities might have aided the sector’s performance.
Per the latest Earnings Trends report, the Q2 earnings season has so far seen releases from approximately 7.3% of the construction sector’s market capitalization on the S&P 500 Index. Of them, 100% have been able to surpass earnings and revenue estimates.
Notably, 10 of the 16 Zacks sectors are expected to register year-over-year gains. Construction is among those that might have witnessed the biggest growth rates in the quarter.
Factors Influencing Q2 Results
The sector is expected to have benefited from modest gains in homebuilding investments. The desire to own a home has still been working in its favor. The sector has also been gaining from modest demand owing to higher repair and remodel activity. Although homeowner spending for home improvements and repairs is expected to soften given the slowdown in homebuilding, retail sales of building materials, and renovation permits, growth in spending for home improvements and repairs is expected to remain well above the market’s historical average.
Moreover, solid demand from non-residential and infrastructural activities for both private and public project work is expected to have supported growth. Prudent cost-saving efforts, a disciplined approach in bidding, project management, strength in funding programs across the states, and higher demand for road repair and maintenance are likely to have acted as the tailwind for the companies’ quarterly performance. Also, bolt-on acquisitions are anticipated to have expanded their geographical reach and product portfolio.
However, the Fed’s hawkish move to combat inflation along with rising home prices are expected to have conspired to limit buying and selling activities in the quarter. Challenges in the housing industry persist in the form of low supply levels, shortage of skilled labor and an upsurge in input prices.
Again, higher raw material costs owing to supply-chain disruptions are likely to have affected the companies’ margins. Additionally, higher land, labor and transportation costs may have been dampeners. While inflation may have limited margin upside, companies have been taking pricing actions, which should have helped them offset such headwinds to some extent.
Q2 Expectations
The overall estimate picture is not a bad one for the broader Zacks Construction sector amid challenges associated with supply-chain disruptions, inflation and transportation costs. Per the latest Earnings Trends, construction sector earnings are expected to increase 18.8% for the second quarter. The growth rate is expected to have slowed from 29% registered in first-quarter 2022. Revenues are projected to increase 16.1%, suggesting a decline from 17.9% growth registered in the prior quarter.
Which Are the Right Picks?
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 to identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.
One can narrow 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 delivering an earnings beat are as high as 70%.
Earnings ESP is our proprietary methodology for determining stocks that have the best chances of coming up with an earnings beat in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Winning Stocks
For investors willing to adopt this strategy, we have highlighted three construction stocks that may stand out this earnings season.
Headquartered in Houston, TX, KBR, Inc. KBR — which provides scientific, technology and engineering solutions to governments and commercial customers — topped earnings estimates in all the trailing four quarters, with the average being 12%.
KBR, Inc. Price and EPS Surprise
KBR, Inc. Price and EPS Surprise
KBR, Inc. price-eps-surprise | KBR, Inc. Quote
KBR is poised to beat expectations when it reports second-quarter 2022 results on Aug 2, before the opening bell. It carries a Zacks Rank #3 and has an Earnings ESP of +1.81%, at present.
Its mission-critical government services, high-end and differentiated government business work, strong margin performance, and proprietary technology solutions, along with a significant increase in backlog (particularly in Government Solution) bode well for the company’s bottom line.
Richardson, TX-based Lennox International Inc. LII — which provides energy-efficient climate-control solutions — topped earnings estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 8.2%.
Lennox International, Inc. Price and EPS Surprise
Lennox International, Inc. Price and EPS Surprise
Lennox International, Inc. price-eps-surprise | Lennox International, Inc. Quote
Lennox is likely to beat expectations when it reports second-quarter 2022 results on Jul 28, 2022, before the market opens. This Zacks Rank #3 company has an Earnings ESP of +1.61%. You can see the complete list of today’s Zacks #1 Rank stocks here.
LII has been witnessing higher demand for its Residential and Refrigeration businesses given growth from both replacement and new construction businesses. This is helping it navigate the challenging backdrop associated with supply-induced constraints, labor constraints, factory inefficiencies, and higher material, freight, distribution, and warranty costs.
Eagle Materials Inc. EXP — which produces and supplies heavy construction materials and light building materials based in Dallas, TX — beat earnings estimates in three of the last four quarters and missed on one occasion, with the average surprise being 4.8%.
Eagle Materials is likely to beat expectations when it reports first-quarter fiscal 2023 results on Jul 28, 2022 before the market opens. Currently, the company carries a Zacks Rank #3 and has an Earnings ESP of +1.56%.
Similar to other aggregates and cement producers, EXP is expected to have witnessed higher shipments. Expanded infrastructure investment and heavy industrial projects of scale are expected to have supported its quarterly shipments. However, higher fossil fuel costs are expected to have weighed on its margins.
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