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 |
Caterpillar Inc | Industrials | Machinery | 69,057 | -12.2 | 7.1 | 0.3 | 1.5 |
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 |
PACCAR Inc | Industrials | Machinery | 25,746 | -5.0 | 6.1 | -1.2 | 2.0 |
Otis Worldwide Corp | Industrials | Machinery | 24,898 | N/A | N/A | N/A | -0.1 |
Cummins Inc | Industrials | Machinery | 25,261 | -2.8 | 8.3 | 0.5 | -0.4 |
Fortive Corp | Industrials | Machinery | 22,967 | -10.6 | 19.4 | 2.9 | 0.3 |
Stanley Black & Decker Inc | Industrials | Machinery | 21,078 | -16.6 | 14.1 | 2.5 | 5.7 |
Dover Corp | Industrials | Machinery | 14,013 | -14.7 | 12.6 | 2.1 | 0.0 |
Ingersoll Rand Inc | Industrials | Machinery | 12,239 | -19.9 | 44.0 | 5.4 | 0.5 |
Xylem Inc/NY | Industrials | Machinery | 11,948 | -15.1 | 18.3 | 1.6 | -1.1 |
IDEX Corp | Industrials | Machinery | 11,543 | -10.4 | 17.9 | 0.8 | -0.3 |
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.