Construction spending increased by a mere 0.1% in December
2013, sharply lower than the 0.8% gain for the earlier month.
This is significantly lower than the gains made last year and, at
first glance, seems to suggest that activity in this sector seems
to be slowing down.
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Engine of Employment
The fact that construction is one of the most crucial sectors for
the economy was borne out once again by this month's employment
report. Construction added the highest number of jobs in January.
The increase of 48,000 easily offset the decline of 22,000 in
Residential and nonresidential building added 13,000 and 8,000
jobs respectively. Meanwhile nonspecialty trade conductors added
13,000 jobs. A report from
Automatic Data Processing, Inc.
), released a few days earlier had estimated that 25,000 jobs
were added by private construction.
The Prospects of Non-Residential Spending
For 2013, the value of construction in the U.S. increased 4.8%.
Spending on private construction increased by 8.5% for the year.
The major contributor to private sector investment was
residential construction, which grew by 18%. On the other hand,
non-residential construction declined by 0.4% during the period.
However, the prospects in this sector are far from gloomy.
Reacting to the data, Ken Simonson, chief economist with the
Associated General Contractors of America (AGC) said,
"Residential construction ended on a strong note in 2013 and
should remain positive for at least the next several months.
Meanwhile private non-residential spending appears to be poised
for a rebound."
Lagged but Sustainable Demand
Growth in investments on private non-residential construction
usually lags behind the economy has a whole. A certain
amount of growth has occurred in this area over the couple of
years but there is more room for growth. Incidentally, a lot of
this growth has happened in the energy and power sectors.
The boom in the oil and gas sector could lead to an increase in
private non-residential construction in the current year. This
will include manufacturing plants, pipelines, railroads and
natural gas fuelling stations.
At the same time, communities located in areas where such
activities are conducted can expect more housing, hotels and
retail construction. According to the AGC, private
non-residential spending should grow between 6 to 10% in 2014.
Below we present three companies operating in the non-residential
construction domain with a diverse set of interests and
capabilities, each of which also have a good Zacks Rank.
Quanta Services, Inc.
Quanta Services, Inc.
) provides infrastructure solutions, focusing on the natural gas
and oil pipeline and electric power sectors. The company offers
specialty contracting services, including design, installation
and maintenance services.
Quanta Services, Inc, holds a Zacks Rank #2 (Buy) and has
expected earnings growth of 13.60%. The forward price-to-earnings
ratios (P/E) for the current financial year (F1) is relatively
high at 17.55.
) provides professional services, including engineering,
procurement, construction and maintenance. The company also
offers project management services worldwide, across such diverse
domains as oil and gas, petrochemicals and manufacturing.
Currently the company holds a Zacks Rank #2(Buy) and has expected
earnings growth of 9.60%. It has a P/E (F1) of 17.59.
Our third choice is
AECOM Technology Corp.
). The company offers technical and management services worldwide
to governments as well as private clients. It is a provider of
planning, consulting and design services for infrastructure,
commercial housing, power and utility facilities.
Besides a Zacks Rank #2 (Buy), AECOM Technology Corporation has
expected earnings growth of 5.90%. It has a relatively higher P/E
(F1) of 11.33.
Recently released growth numbers indicate that the economy is now
set for better times. This is being supported by repeated
reductions of the Fed stimulus package. As the economy continues
to pick up steam, these stock picks are in a position to leverage
the gains accruing to the construction sector.