5 Construction Stocks Likely To Stand Tall In Q2 Earnings

Though factors like stable economic conditions, solid jobs market, increased infrastructure spending (mainly in non-residential areas) and a benign rate environment brighten up the second-quarter earnings picture for the construction sector, estimates tell a different tale.

The sector, considered a reflection of the country’s economic health, is expected to have faced headwinds like moderating U.S. economic growth, softness in the housing sector and rising land and labor costs in the June quarter. Again, slowdown in other major global economic regions is adding to the glum.

Sector heavyweights like Lennar (NYSE:LEN) LEN and United Rentals URI have already released their Q2 numbers. The companies’ bottom line not only surpassed analysts’ expectations but also grew on an annualized basis. Then again, Fastenal’s FAST top and bottom lines could not meet market expectations, thanks to slower activity levels. The company’s earnings declined on a year-over-year basis and sales growth decelerated.

Q2 Expectations

Half of the Zacks broad sectors (8 out of 16) are expected to end up in the negative territory in the second quarter of 2019. As far as estimates for the construction sector are concerned, the overall picture is similarly bleak. Per the latest Earnings Preview, construction sector earnings are expected to decline 9.9% in the second quarter, compared with a 4.9% drop in the first. Revenues are projected to decline 0.9% (versus 4.6% growth in Q1).

The construction sector is expected to witness two consecutive quarters of earnings decline after strong growth in each of the four quarters of 2018.

Looking on the Bright Side

Without a doubt, construction companies have for long been grappling with trade war-driven increase in raw material costs, rising freight expenses, higher incentives to drive sales and volatility in commodity prices. Along with this, higher land/labor costs are pressing concerns. These headwinds will keep margins of many companies in the construction space under pressure, hurting bottom lines to some extent.

Nonetheless, the sector is poised to gain from a significant number of project awards across multiple segments, including communications, transmission and power, and infrastructural projects in domestic as well as international markets.

Notably, construction spending grew double digits in areas like highway and street, sewage and water disposal, water supply, conservation and development, and manufacturing during the first five months of 2019. Meanwhile, although residential outlays remained in a soft patch as home building declined for the fifth straight month in May, per the latest Commerce Department report, spending in multi-family homes remains the bright spot.

Which Are the Right Picks?

Despite higher input costs and trade tensions, the construction space looks attractive on solid infrastructure spending activity, consistent job growth and Fed’s dovish stance.

Given the headwinds, it is not easy to find stocks with the potential to trump earnings estimates. Here, the Zacks methodology comes in handy as it helps identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.

An easy way is to consider stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) with a positive Earnings ESP usually hints at an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%.

Earnings ESP is our proprietary methodology for determining stocks that have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Winning Stocks

For investors willing to adopt this strategy, we have highlighted five construction stocks that may stand out this season.

Our first choice is Rayonier Inc. (NYSE:RYN) . This timberland real estate investment trust — with assets located in some of the most productive timber-growing regions in the United States and New Zealand — topped earnings estimates in three of the trailing four quarters, the average beat being 74.2%.

It looks poised to beat expectations in the second quarter as well when it reports on Aug 7. The company carries a Zacks Rank #3 and has an Earnings ESP of +19.15%. The Zacks Consensus Estimate for its earnings per share is pegged at 12 cents. You can see the complete list of today’s Zacks #1 Rank stocks here.

Our second choice is a Scottsdale, AZ-based public homebuilder — Taylor Morrison Home Corporation (NYSE:TMHC) . The company surpassed earnings estimates in the trailing four quarters, the average positive surprise being 38.7%. It looks poised to beat expectations in the second quarter as well. The company carries a Zacks Rank #3 and has an Earnings ESP of +15.87%. The Zacks Consensus Estimate for its earnings per share is pinned at 63 cents.

Our third choice is Arcosa, Inc. (NYSE:ACA) — a manufacturer of infrastructure-related products and services which serves construction, energy and transportation markets. The company topped earnings estimates in the last reported quarter by 81.3% and it is poised to beat expectations when it reports second-quarter 2019 results on Aug 1.

For the upcoming release, Arcosa has a Zacks Rank #2 and an Earnings ESP +15.22%. The Zacks Consensus Estimate for its earnings per share is pegged at 46 cents.

Our fourth choice is M.D.C. Holdings, Inc. (NYSE:MDC) — a Denver, CO-based homebuilder. The company beat earnings estimates in two of the last four quarters, the average beat being 8.3%. It looks set to beat expectations in the second quarter as well when it reports on Jul 31.

For the upcoming release, M.D.C. Holdings has a Zacks Rank #1 and an Earnings ESP +2.68%. The Zacks Consensus Estimate for its earnings per share is pegged at 78 cents.

Our final choice is KBR, Inc. (NYSE:KBR) , a leading global engineering, construction and service company. It topped earnings estimates in the trailing four quarters, the average beat being 8.9%.

It looks poised to beat expectations in the second quarter as well when it reports on Jul 31. The company carries a Zacks Rank #2 and has an Earnings ESP of +1.86%. The Zacks Consensus Estimate for its earnings per share is pegged at 40 cents.

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