Back to main

Construction on a Tear - Zacks Industry Rank Analysis

Posted
1/9/2013 1:14:00 AM
By: Zacks.com
Referenced Stocks:BLDR;CCF;DY;HD;HOV

Construction Jobs on the Rise

What did I find most encouraging about the December ADP private payroll and Federal government jobs reports?


This pair of sectors moves together: one finances projects, the other builds them. What a nice positive feedback loop.  It takes the overall macro economy system up in a cyclical fashion.

A serial pick-up in jobs means strong underlying profits.  Firms don't hire workers unless they make strong profits by doing so.  This led me to the Construction Sector to look for stock picks.

Zacks Industry Classifications

To look for picks, start at the top.  Our expanded industry classification provides a fairly granular view of industries by tracking more than 250 different groups. The Zacks Industry Rank, which derives its predictive power from the time-tested Zacks Rank, then helps us identify the industries that are expected to outperform others.

The top 1/3rd of the Zacks Industry Rank qualify as industries with 'Good' prospects, the bottom 1/3rd have 'Bad' prospects, and middle 1/3rd as 'Neutral.'

The definition of size that matters here is not the total sales or market capitalization, but the number of companies in the 'industry.' Many of these 'industries' have just a few companies in them. It's not particularly noteworthy if a single small industry shows up doing well. A single firm with good news can propel a one- or two-firm industry to the top (or bottom) of the list.

It is interesting when you see a cluster of similar industries close to the top of the list.  This is where we find the construction industries now. The same holds true for the bottom of the list.

Zacks #1 Rank (Strong Buy) Construction Firms

In evaluating Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Rank stocks than #4 or #5 Rank stocks) and some improvement the relative position from the prior week.

It also helps to understand exactly what the Zacks Industry Rank is. The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800-pound gorilla that dominates the industry or some very small niche player in the space -- they have the same influence on the Industry Rank.

Also, that means the bigger the industry in terms of number of firms, the less influence any given company has on the Industry Rank. It also implies small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. Thus, we do not always focus on the very highest-rated industries, but on the highest-rated ones in which there are a large number of firms.

Construction Groups

Zacks breaks up the construction sector into ten groups of companies. One falls in the retail/wholesale industry, the rest make a product or provide a service.  Nine of the ten Zacks industry groups showed up in the top 1/3rd of all industries, meaning they have 'Good' prospects.

Three very small industries, by number of companies, ranked very high in Zacks Industry Ranks in the first week of January 2013:


The next six groups fell into ranks from #35 to #72, in the top 1/3rd of all industries.  But these groups had more companies, which means these Zacks Ranks probably mean something more here, even at a lower rank.


A remaining group, Engineering R&D Services (16 names, #215 Zacks Industry Rank, down -17 in past week), fell into the bottom 1/3rd -- a 'Bad' outlook.  This is the construction sector dedicated solely to providing services.

Interestingly, Engineering R&D Services was the construction group whose leading companies focused on providing services to government entities.  Its two top-ranked companies were located in California ( Willdan Group [ WLDN ] and National Technical Systems [ NTSC ].  Could the wheels be turning in this bellwether state again?

I'd like to organize these ten Zacks groups further into five tighter sets, based on a more coherent and physical vision of a construction "industry."  So I organized the activities of the top Zacks Rank companies as sub-industries, around nodes of final activity. And I put each company in upstream and downstream positions to create a value chain within a given physical sub-industry. This gives me a more tangible sense of what is really going on.  

Here are Zacks #1 or #2 Ranked construction companies placed in each of my five physical groups:

I put a star by the company I think looks best in my groups.

Recreational Vehicles:

(1) PATRICK INDUSTRIES, INC. ( PATK ) Market Cap $176M. Patrick Industries is a manufacturer and supplier of building products and materials to the manufactured housing and recreational vehicle industries. In addition, they are expanding as a supplier to certain other industrial markets, such as furniture manufacturing, marine and the automotive aftermarket. They manufacture decorative vinyl and paper panels, cabinet doors, countertops, aluminum extrusions, drawer sides and wood adhesives.

*(2) THOR INDUSTRIES, INC. ( THO ) produces and sells a wide range of recreational vehicles and small and mid-size buses in the United States and Canada as well as related parts and accessories. The Company also manufactures axles and suspension systems.

(3) WINNEBAGO INDUSTRIES, INC. ( WGO ) is a leading U.S. manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. Motor home sales by the Company represented more than 87 percent of its revenues in each of the past five fiscal years. The Company's motor homes are sold through dealer organizations primarily under the Winnebago, Itasca, Vectra, Rialta and Luxor brand names.

Telecom Infrastructure:

(1) CHASE CORP. ( CCF ) Market Cap $170M. Chase manufactures insulating and semi-conducting electrical cable tape wrappings, cable filling compounds, anti-corrosion mastics, reinforced rubber and asphalt tapes and bridge deck corrosion barrier membranes. Its principal products are protective coatings and tape products sold in national and international markets.

*(2) DYCOM INDUSTRIES, INC. ( DY ) is a leading provider of specialty contracting services throughout the United States. These services include engineering, construction, maintenance and installation services to telecommunications providers, underground locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric utilities and others.

(3) MASTEC INC. ( MTZ ) is one of the largest providers of construction services to the telecommunications industry in the United States. The Company's principal business consists of the installation and maintenance of aerial, underground and buried copper and fiber optic cable, underground conduit, manhole systems and related construction for local telephone companies, including Regional Bell Operating Companies such as BellSouth Telecommunications, Inc., U.S. West, Inc. and SBC Communications, Inc., and non-Bell local telephone companies such as Sprint Corp., and GTE Corp.

Housing:

(1) POTLATCH CORP. ( PCH ) is an integrated forest products company with substantial timber resources. It is engaged principally in the growing and harvesting of timber and the manufacture and sale of wood products, printing papers and pulp and paper products. Its timberlands and all of its manufacturing facilities are located within the continental United States (Zacks Rank #1).

(2) HOME DEPOT ( HD ), LOWES CO. ( LOW ) and BUILDERS FIRSTS ( BLDR ) (all Zacks Rank #2).

*(3) HOVNANIAN ( HOV ), MDC HOLDINGS ( MDC ), *RYLAND ( RYL ) and LENNAR CORP ( LEN ) (all Zacks Rank #2).  Homebuilders.

Commercial and Industrial Construction Contractors mainly (also helps apartments and homeowners):

(1) EAGLE MATERIALS INC. ( EXP ) is a Dallas-based company that manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and Aggregates (Zacks Rank #1).

*(2) COMFORT SYSTEMS USA, INC. ( FIX ) is a national provider of comprehensive heating, ventilation and air conditioning installation, maintenance, and repair and replacement services. They operate primarily in the commercial and industrial HVAC markets, and perform most of their services within manufacturing plants, office buildings, retail centers, apartment complexes and healthcare, education and government facilities.

*(3) UNITED RENTALS, INC. ( URI ) is one of North America's largest equipment rental companies with over branches in the majority of states, several Canadian provinces and Mexico. The company offers for rent different types of equipment to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others.

Engineering R&D Service Providers (least attractive industry within construction):

(1) WILLDAN GROUP, INC. ( WLDN ) is a leading single resource provider of specialized outsourced services to small and mid-sized public agencies located primarily in California and other western states. Willdan Group, Inc. assists cities and other government agencies with a broad range of services, including civil engineering, building and safety services, geotechnical engineering, financial and economic consulting, and disaster preparedness and homeland security. Strategically located throughout California and other Western states.

*(2) NATIONAL TECHNICAL SYSTEMS, INC., ( NTSC ) based in Calabasas, California, is a leading provider of engineering and testing services to the defense, aerospace, telecommunications, automotive and high technology markets. Through a worldwide network of resources, NTS provides full product life-cycle support, offering world-class design engineering, compliance, testing, certification, and quality registration and program management. It provides conformity assessment and management system registration services, as well as technical personnel for product certification, product safety testing, and product evaluation. The company offers management registration and certification services. It operates in the United States, Japan, Vietnam, Germany and Canada.

I also did three screens on top Zacks Ranked stocks in construction.  First, I wanted to make sure the picks I made were in the top half on sentiment, measured by the number of Strong Buy brokerage recommendations.  Second, I wanted to make sure the picks were registering strong profits from a shareholder perspective, measured by the current return on equity.  I did keep picks here that didn't do as well. Their profit forecasts going forward were much better. Third, I wanted to make sure stock markets hadn't priced in all of the good news by running up stock valuations.  So I ranked them by the price to earnings (P/E) ratio looking forward one year (F1).  Anything below a 15 P/E is pricing beneath the S&P 500 in historic terms.

You can see I made tradeoffs here.  Not all of my picks cleared all three screens. But the one tradeoff I didn't make was that each pick comes out of a strong Zacks Ranked Industry; has a top Zacks Rank for that industry; and the underlying macro fundamentals of the entire sector are strong and getting stronger.

My picks were:

Dycom - DY
Comfort Systems - FIX
Ryland Homes - RYL
United Rentals - URI
Thor Industries - THO



BUILDERS FIRSTS (BLDR): Free Stock Analysis Report

CHASE CORP (CCF): Free Stock Analysis Report

DYCOM INDS (DY): Free Stock Analysis Report

HOME DEPOT (HD): Free Stock Analysis Report

HOVNANIAN ENTRP (HOV): Free Stock Analysis Report

LENNAR CORP -A (LEN): Free Stock Analysis Report

LOWES COS (LOW): Free Stock Analysis Report

MDC HLDGS (MDC): Free Stock Analysis Report

MASTEC INC (MTZ): Free Stock Analysis Report

(NTSC): ETF Research Reports

(PATK): ETF Research Reports

POTLATCH CORP (PCH): Free Stock Analysis Report

RYLAND GRP INC (RYL): Free Stock Analysis Report

THOR INDS INC (THO): Free Stock Analysis Report

UTD RENTALS INC (URI): Free Stock Analysis Report

WINNEBAGO (WGO): Free Stock Analysis Report

(WLDN): ETF Research Reports

To read this article on Zacks.com click here.

Zacks Investment Research