Last week’s rout in US equity markets was particular tough with US infrastructure related stocks down 9.6% but this week the group has staged a 3.4% comeback on the news that the Trump administration is preparing a $1trn infrastructure plan to boost the economy. It’s difficult to guess which stocks will do best under this infrastructure plan so instead we have created a basket of 30 US construction related stocks across different industries that could get a boost if not economically then certainly in terms of sentiment over the coming months.
|Name||Sector||Industry||Mkt. Cap.||Return YTD (%)||EV/EBITDA||Net-debt-to-EBITDA||Chg. Est. EPS 1m (%)|
|Johnson Controls International plc||Industrials||Building Products||25,819||-13.4||13.6||1.3||-0.2|
|Carrier Global Corp||Industrials||Building Products||18,406||N/A||N/A||N/A||0.3|
|Masco Corp||Industrials||Building Products||12,729||1.2||10.9||1.5||6.4|
|Lennox International Inc||Industrials||Building Products||8,608||-7.4||14.3||2.1||-0.1|
|Fortune Brands Home & Security Inc||Industrials||Building Products||8,629||-3.5||12.0||2.3||-0.3|
|A O Smith Corp||Industrials||Building Products||7,723||1.7||14.6||-0.3||1.9|
|Trex Co Inc||Industrials||Building Products||6,940||33.5||30.0||0.3||0.6|
|Owens Corning||Industrials||Building Products||6,016||-13.6||25.3||2.2||2.3|
|AZEK Co Inc/The||Industrials||Building Products||4,507||N/A||N/A||6.0||N/A|
|Armstrong World Industries Inc||Industrials||Building Products||3,630||-18.9||10.1||0.8||-0.5|
|Simpson Manufacturing Co Inc||Industrials||Building Products||3,651||5.1||14.2||-0.5||0.0|
|Advanced Drainage Systems Inc||Industrials||Building Products||3,483||29.1||131.4||3.1||24.0|
|Jacobs Engineering Group Inc||Industrials||Construction & Engineering||11,077||-4.8||16.0||1.9||0.4|
|AECOM||Industrials||Construction & Engineering||6,227||-9.8||19.7||1.7||2.2|
|Quanta Services Inc||Industrials||Construction & Engineering||5,299||-5.6||7.4||1.6||-0.8|
|EMCOR Group Inc||Industrials||Construction & Engineering||3,426||-27.4||6.3||0.7||-1.1|
|MasTec Inc||Industrials||Construction & Engineering||3,165||-33.1||3.8||1.3||2.4|
|Valmont Industries Inc||Industrials||Construction & Engineering||2,404||-24.5||8.6||1.6||-1.1|
|Illinois Tool Works Inc||Industrials||Machinery||53,863||-4.4||15.8||1.6||-1.5|
|Deere & Co||Industrials||Machinery||48,452||-10.1||7.4||0.5||1.5|
|Otis Worldwide Corp||Industrials||Machinery||24,898||N/A||N/A||N/A||-0.1|
|Stanley Black & Decker Inc||Industrials||Machinery||21,078||-16.6||14.1||2.5||5.7|
|Ingersoll Rand Inc||Industrials||Machinery||12,239||-19.9||44.0||5.4||0.5|
Source: Bloomberg and Saxo Group
The basket as a whole is down 8% year-to-date on an equal-weighted basis which is in line with the S&P 500. These construction related stocks have generally a low market capitalization except for the machinery companies which are most likely more global in their business footprint. The average net-debt-to-EBITDA is only 1.6x compared to 1.9x for the S&P 500 indicating a lower leverage which means lower default risk all things equal. The basket’s equal-weight valuation is equal to the S&P 500 if Advanced Drainage Systems is excluded from the calculation. The blended 12-month EPS estimates are up on average 1.5% the past four weeks which also mimics the S&P 500. If the Trump administration’s infrastructure plan materializes we would expect estimates to drastically improve.
An alternative to our custom basket is the Invesco Dynamic Building & Construction ETF (PKB:arcx) which holds 30 US-listed companies engaged in providing construction and related engineering services for building residential/commercial/industrial properties, or large infrastructure projects.
Measured since 1 January 2015 this group of stocks (equal-weighted) has done better than the S&P 500 but with a higher beta which makes sense since this industry is pro-cyclical. The high downside beta is also evident in the fact that this group of stocks experienced a 70% drawdown compared to only 32% in the S&P 500.
Besides the potential infrastructure plan by the Trump administration the current Fed policy has pushed down interest rates including the US 30-year fixed mortgage rate which hit a record 3.13% for the week ending 18 June. This is a direct positive factor for the construction sector and as such should help lift earnings and the outlook for these stocks.