Chicago, IL – July 20, 2022 – Today, Zacks Equity Research discusses Dycom Industries, Inc. DY and Primoris Services Corp. PRIM.
Industry: Heavy Construction
Link: https://www.zacks.com/commentary/1954130/2-heavy-construction-stocks-to-buy-despite-industry-challenges
Unprecedented supply-chain issues and project delays, a tight labor market as well as rising costs are taking a toll on the Zacks Building Products - Heavy Construction industry. Nonetheless, solid growth in end markets like communications, transmission and power as well as other infrastructural projects have been benefiting the industry players.
Also, President Joe Biden's major infrastructure initiative to improve the nation's roads, bridges and broadband is adding to the bliss. Dycom Industries, Inc. and Primoris Services Corp. are set to benefit from solid market prospects despite the above-mentioned headwinds.
The Zacks Building Products - Heavy Construction industry consists of mechanical and electrical construction, industrial and energy infrastructure as well as building service providers. This industry comprises heavy civil construction companies that specialize in the building and reconstruction of transportation projects, including highways, roads, bridges, airfields, ports and light rail.
The companies serve commercial, industrial, utility and institutional clients. The industry players are engaged in engineering, construction and maintenance of communications infrastructure, oil and natural gas pipelines as well as processing facilities for energy and utility industries. These firms are also engaged in mining and dredging services in the United States and internationally.
Biden's Infrastructural Deal: The announcement of President Joe Biden's massive infrastructure plan to build modern sustainable infrastructure and a clean future will have major implications on the U.S. economy and the construction industry over the next five years. Biden's plan for accelerated investment in far-reaching areas from roads and bridges to green spaces, water systems, electricity grids as well as universal broadband laid a new foundation for sustainable growth, withstanding the impacts of climate change and improving public health, including access to clean air and clean water. The aforesaid infrastructural expansion plan will be a boon for construction-related companies.
Strong Prospects in Telecommunication: The ramp-up of projects related to 5G has been a silver lining for the industry players. Increased demand from telecom customers for wireline networks, wireless/wireline converged networks and wireless networks using 5G technologies has been benefiting the industry players.
Construction work for communications is expected to pick up on huge investments in network expansion. The proliferation of smartphones should drive demand for network bandwidth and mobile broadband. Also, the industry is poised to gain from a significant number of project awards across multiple segments, including communications, health care, transmission and power, along with infrastructural projects in domestic as well as international markets.
Solid Inorganic Moves & Renewable Business Prospects: Acquisitions have been the companies' preferred mode of solidifying their product portfolios and leveraging new business opportunities. Again, owing to increased renewable project activity and expansion of services in biomass as well as other smaller production facilities, the power generation and industrial construction market is poised to see sizable growth.
The companies are well positioned to gain from the renewable energy drive of the pro-environmental Biden administration. Development and deployment of technology solutions across the full spectrum of decarbonization efforts, comprising all facets of infrastructure for providing carbon-free energy solutions, should benefit the companies going forward.
Coronavirus-Related Woes: The biggest headwinds for the industry players are currently centered on the COVID-19 pandemic, labor availability and supply-chain delays. The companies have been facing the impact of the same on project schedules, given governmental permitting and crew social-distancing mitigation. In addition to a tight labor market, a rise in raw material costs has been making things worse.
Meanwhile, businesses of the industry players are susceptible to the cyclical nature of the markets in which clients operate and are dependent on the timing and funding of new awards. Hence, volatility in credits and operating risks associated with economic down-cycles are pressing concerns.
The Zacks Building Products - Heavy Construction industry is a 11-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #210, which places it in the bottom 16% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a weak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. Since March 2022, the industry's earnings estimates for 2022 have been revised downward to $2.72 from $2.92 per share.
Despite the industry's gloomy near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it's worth taking a look at the industry's shareholder returns and current valuation.
The Zacks Building Products - Heavy Construction industry has underperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 17.8% versus the broader sector's 16.4% decline. Meanwhile, the S&P 500 has slipped 11.2% in the said period.
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing heavy construction stocks, the industry is currently trading at 11.8X versus the S&P 500's 16.6X and the sector's 10.5X.
Over the past five years, the industry has traded as high as 18.4X, as low as 7.5X and at a median of 13.4X.
Below, we have discussed two stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Dycom: Based in Palm Beach Gardens, Fl, Dycom is a specialty contracting service provider in the United States. The company has been benefiting from higher demand for network bandwidth and mobile broadband, extended geographic reach along with proficient program management and network planning services.
Although persistent impacts of the complexity of a large customer program, lower year-over-year revenues related to other large customers and higher fuel costs are concerns, prospects of the Telecommunication business look good, given increased customer need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks.
Backlog ($5.593 billion) activity during the fiscal first quarter reflects solid performance, with the booking of new work and renewing existing work. Dycom expects considerable opportunities across a broad array of customers.
Dycom, currently carrying a Zacks Rank #2, has gained 45.6% over the past year. Earnings estimates have increased to $3.29 per share from $2.99 over the past 60 days. Earnings per share for fiscal 2023 are expected to grow 116.5%.
Primoris Services: Based in Dallas, TX, this is a specialty contractor company operating in the United States and Canada. A robust backlog level of more than $4.025 billion and solid contract awards in the Energy/Renewables and Utilities segment depict incredible momentum going forward despite the supply-chain and permitting challenges. Utility-scale solar projects continued to drive the progress of the Energy/Renewables segment.
Primoris Services — currently carrying a Zacks Rank #2 — has slipped 25.9% over the past year. Nonetheless, earnings for 2022 are expected to grow 19.4%.
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