Outlays on U.S. construction projects remained upbeat in August per a Commerce Department report on Oct 1. The metric rose on the back of higher government spending, which has been the highest since 2009. Increased expenses on new federal, state and local construction projects offset the decline in private construction activity in the month.
It is true that Fed's aggressive stance of raising the cost of borrowing, soaring house prices and material inflation have increased apprehension across the American construction market. However, robust demand-side picture and expansionary fiscal measures of the Republican-led government will likely continue to shore up spending across the sector going forward.
The Zacks Construction sector is currently placed in the top 44% of the 16 Zacks sectors. Per our latest Earnings Preview article, earnings and revenues of all S&P 500 construction stocks will likely climb 38.7% and 20.6%, respectively, on a year-over-year basis in this reporting cycle.
Against this backdrop, it makes sense to bet on selective construction stocks for alluring returns.
U.S. Construction Activity Gains Traction on Public Outlay
U.S. construction spending logged a monthly gain of a paltry 0.1% in August but climbed 6.5% on a year-over-year basis. In the first eight months of 2018, the metric totaled $862 billion, higher than $818.7 billion spent from January-August 2017.
Residential and non-residential construction spending edged down 0.7% and 0.2%, respectively, in August. However, these declines were offset by a robust 2% monthly gain in public construction spending, which hit a nine-year high.
In August, expenses on federal government construction programs increased 5.9%, the highest in the last 10 months. Local and state government construction spending increased 1.7%, the highest since March 2009.
From the non-residential domains, only construction outlay for office buildings moved up 0.8% month over month in August.
Can Supply Side Setbacks Derail Future Growth?
The U.S. construction sector is currently weighed down by some supply-side constraints. Builders are troubled by higher mortgage rates, limited construction workforce and material cost inflation. Additionally, Fed's stand to raise interest rate for the third time this year has made the state of affairs difficult for the sector.
Despite these challenges, an upbeat construction spending report for August makes us optimistic about the sector's future growth.
Sales of new single-family homes in the United States rebounded in August, exceeding the prior month's reading by 3.5%. This shows that a lower number of existing homes options have shifted homebuyers' demand toward new builds. A higher-than-50 reading of the National Association of Home Builders confidence index in September and rise in August housing start numbers also indicate improving homebuilding market conditions in the United States.
The U.S GDP increased 4.2% in the second quarter, the highest in almost four years.The economy is still on track to meet President Trump's annual growth target of 3%. We believe that increased job creation and higher wage rates will likely spur U.S. residential construction demand in the months ahead. In addition to this, the tax overhaul, higher government spending and the President's most awaited $1.5 trillion infrastructure program will likely drive public and corporate construction outlays moving ahead.
Below, we have handpicked five top-ranked stocks from the construction sector that will likely solidify your portfolio.
The companies carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a VGM Score of A or B. Additionally, these stocks have witnessed positive earnings estimate revisions in the past 60 days.
Armstrong Flooring, Inc. AFI manufactures, designs, and sells flooring products in North America and the Pacific Rim.
The Zacks Consensus Estimate for earnings has moved up 79.2% to 43 cents per share for 2018. The company's projected year-over-year earnings growth rate is currently pegged at 104.8% and 53.5% for 2018 and 2019, respectively. Armstrong Flooring's shares have gained 22.1% in the past three months. The company sports a Zacks Rank #1 and has a VGM Score of B. You can see the complete list of today's Zacks #1 Rank stocks here .
Continental Building Products, Inc. CBPX produces and sells gypsum wallboard and other complementary finishing products in the market.
The company carries a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 5.2% to $2.03 per share for 2018. The company's projected year-over-year earnings growth rate is currently pegged at 52.6% and 16.3% for 2018 and 2019, respectively. Continental Building's shares have gained 15.6% in the past three months.
D.R. Horton, Inc. DHI is a premium homebuilding company in East, Midwest, Southeast, South Central, Southwest and West America.
The company carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for earnings has moved up 1.1% to $4.65 per share for fiscal 2019 (ending September 2019). The company's projected year-over-year earnings growth rate is currently pegged at 41.2% and 20.1% for fiscal 2018 and 2019, respectively. D.R. Horton's shares have gained 3.6% in the past three months.
Fluor CorporationFLR provides procurement, engineering, modularization, commissioning, fabrication, maintenance and project management services in the global forum.
The company carries a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 0.4% to $2.27 per share for 2018. The company's projected year-over-year earnings growth rate is currently pegged at 39.3% and 53.9% for 2018 and 2019, respectively. Fluor's shares have gained 24.5% in the past three months.
Jacobs Engineering Group Inc. JEC offers professional, technical and construction services.
The company carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for earnings has moved up 4.4% to $5.25 per share for fiscal 2019 (ending September 2019). The company's projected year-over-year earnings growth rate is currently pegged at 35.2% and 19.7% for fiscal 2018 and 2019, respectively. Jacobs' shares have gained 22.6% in the past three months.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportContinental Building Products, Inc. (CBPX): Free Stock Analysis ReportArmstrong Flooring, Inc. (AFI): Free Stock Analysis ReportJacobs Engineering Group Inc. (JEC): Free Stock Analysis ReportD.R. Horton, Inc. (DHI): Free Stock Analysis ReportFluor Corporation (FLR): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research