So far this year, the homebuilding industry experienced one of the strongest spring markets in a decade. Moreover, the sustained period of low mortgage rates has driven home sales. As measured by the National Association of Home Builders’ Housing Market Index (HMI), home builder sentiment reads a “confident” figure of 63 out of 100.
US GDP, New Home Sales Solid
With an improving economy, encouraging job numbers and affordable mortgage rates, homebuilding should gain further steam going forward. It might be a good idea for home shoppers to buy this fall or winter, rather than waiting for next spring.
The latest data revealing third-quarter gross domestic product or GDP numbers represented a significant improvement over the first half of 2016 and the best quarterly performance in two years.
GDP increased at a 2.9% annual rate, more than double the 1.4% recorded in the second quarter. This marks the highest improvement since the second quarter of 2015. Improving economic growth supported by a better employment picture generally boosts household formations and provides a basis for stronger housing demand.
More so, through the first nine months of 2016, new home sales grew 13% year over year. Despite a weak start this year amid equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals.
Q3 So Far
We have already witnessed strong performance by homebuilders in 2016 despite the familiar challenges of weak global economic growth. Rising land and labor costs are also threatening margins as they limit homebuilders’ pricing power.
Overall, the construction sector’s earnings are expected to increase 6.7% in the third quarter, as against the 7.5% earnings growth in the second quarter. Revenues too are expected to increase 7.1% overall (4.7% growth in Q2) while margins are expected to remain flat (0.02% in Q2).
In spite of the economic woes, investing in construction stocks seems lucrative at the moment. So, it is a profitable strategy to zero in on a handful of construction names that are poised to beat earnings estimates this quarter. An earnings beat would also pave the way for stock price appreciation.
Which Are the Right Picks?
Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the construction space. One way to confine the list of choices during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP is usually an indication of an earnings beat.
Earnings ESP is our proprietary methodology for determining which stocks 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.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
For investors seeking to apply this strategy to their portfolio, we have highlighted three construction stocks that may stand out this season…
Construction Stocks Set to Trump Earnings: Aecom (ACM)
Aecom (ACM) specializes in providing integrated services for planning, construction and maintenance of infrastructure that includes consulting, architecture, engineering as well as managing the requirements for energy, water and environment for private and public clients. Its Construction services business has been doing well on the back of bountiful growth opportunities in the building construction market.
Aecom is currently eyeing multiple investment options in key end markets that look promising for each of its business segments. In the U.S., nine states have approved laws to enable design build in the infrastructure market, unlocking fresh opportunities for the company.
This apart, we believe solid business bonds with project developers and foreign direct investment partners are opening up multiple opportunities for Aecom in new markets. The company ended third-quarter fiscal 2016 with over $38 billion in backlog, which is a key indicator of future revenue growth.
The company has delivered positive earnings surprises in three of the past four quarters with an average beat of 10.83%. The Zacks Consensus Estimate for fourth-quarter fiscal 2016 earnings stands at 73 cents.
Based in Los Angeles, CA, this Zacks Rank #3 stock has an Earnings ESP of +4.11%. The company is expected to report fourth-quarter fiscal 2016 results on November 14, before the opening bell.
Construction Stocks Set to Trump Earnings: Quanta Services Inc (PWR)
Quanta Services Inc (PWR) is a leading national provider of specialty contracting services, and one of the largest contractors serving the transmission and distribution sector of the North American electric utility industry.
Quanta is confident about a rebound in its end markets in the coming quarters given solid growth drivers like an aging grid, shifting generation mix and implementation of clean energy initiatives.
Moreover, its revenues will likely benefit from the expected mobilization of a number of large diameter pipeline projects. Its strong presence in the mainline pipe markets and record backlog levels are also likely to aid profitability going ahead.
However, Quanta Services has a choppy earnings beat history, having missed estimates twice in the trailing four quarters.
That said, for the upcoming release, Quanta Services has an Earnings ESP of +1.96% and a Zacks Rank #2.
The company is expected to report third-quarter results on November 3, before the market opens.
Construction Stocks Set to Trump Earnings: Thor Industries, Inc.(THOR)
Thor Industries, Inc. (THOR) makes a wide range of recreational vehicles (RVs) at various manufacturing facilities located in Indiana and Ohio and sells them through independent dealers in the U.S. and Canada.
Fiscal 2016 has been an outstanding year for the company as it witnessed a number of achievements, ranging from the acquisition of Jayco, the successful integrations of Jayco, Cruiser/DRV and Postle Aluminum, and record sales and earnings in the fourth quarter as well as fiscal 2016.
Thor Industries expects strength in the RV market and shift toward more moderately priced towable products as well as the inclusion of full-year results of Jayco to lead to double-digit revenue growth in fiscal 2017.
The company has a long-term earnings growth expectation of 11.9%. The company reported positive earnings surprises in all of the last four quarters with an average beat of 22.33%.
For the upcoming release, Thor Industries has an Earnings ESP of +4.88% and a Zacks Rank #2. The company is expected to report first-quarter fiscal 2017 results on December 5.
The only hiccup in this otherwise robust economic scenario is the uncertainty over the rate hike decision. It is not clear whether the Federal Reserve will finally raise the rate this year after it ruled out the action during its last meeting.
A hike in the Federal fund rate would push mortgage interest rates higher. High mortgage rates dilute demand for new homes, as mortgage loans become expensive. This lowers a buyer’s purchasing power and may hurt volumes, revenues and profits of homebuilders.
Even if we assume an accompanying rise in mortgage rates with an interest rate hike, we believe they should keep housing affordable. Slightly higher rates notwithstanding, slowing housing price gains, easing credit availability, rising rentals, limited supply of inventory, improving consumer confidence and better purchasing power should keep the housing market momentum alive.
And if homebuilding gets a boost, can the broader construction sector be left far behind? A close look at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to tap the optimism in the sector.
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