Quanta Services Vs. AECOM: Which Construction Stock To Bet On?

Investors are always on the lookout for companies that consistently yield good returns over a considerable time frame. Currently, the Construction space is one of the sectors that is enjoying multiple growth drivers. Per the U.S. Census Bureau’s data for January, the sector experienced positive year-over-year growth in terms of spending.

Moreover, recovery in the housing market has led to an increase in property and other forms of real estate tax collections in recent quarters. This, in turn, is expected to allow a number of public agencies to boost spending, ultimately boosting construction activities further. Comprehensive tax cuts, pro-growth regulatory environment and sustained increases in defense spending are other major catalysts that bode well for this space.

Given this backdrop, let’s focus on the comparative analysis on some key metrics of two companies in the Engineering - R&D Services industry falling under the broader Construction space — Quanta Services, Inc. (NYSE:PWR) and AECOM (NYSE:ACM) . At present, Quanta Services has a market capitalization of $5.55 billion, while that of AECOM stands at $5.79 billion.

Valuation

AECOM’s stock is presently trading at a forward P/E multiple of 12.2, while Quanta Services is trading at a multiple of 20.1. Relative to the industry’s PE multiple of 15, we see that Quanta Services is richly valued while AECOM is trading at a discount.

Past One-Month Share Price Performance

In the past month, Quanta Services’ stock has gained 5.4%, compared with AECOM’s return of 4.3%.

However, both companies trumped the industry’s modest increase of 0.3%.

Zacks Rank

While both Quanta Services and AECOM carrya Zacks Rank #3 (Hold), the industry is ranked #101 out of the 265 industries in Zacks coverage.

Favorable infrastructure spending as well as strong US job demand has been driving the performance of the engineering, procurement and construction services providers from the Construction space. Notably, the Engineering - R&D Services industry currently falls within the top 38% of the 265 different industries tracked by Zacks. Thus, any positive industry developments should benefit both companies.

Earnings Trend

As far as earnings history is concerned, Quanta Services has outperformed the Zacks Consensus Estimate twice in the trailingfour quarters, with an average negative surprise of 1.4%. AECOM has delivered positive earnings surprises thrice in the trailing four quarters, with an average earnings beat of 17.4%. So in terms of earnings trends, AECOM clearly comes out as the better play.

Estimate Revisions

For 2018, Quanta Services witnessed four upward estimate revisions versus two downward in the last 60 days. As a result, the Zacks Consensus Estimate moved north from $2.47 to $2.63, depicting bullish analyst sentiment surrounding the stock. AECOM’s consensus mark for 2018 also climbed from $2.66 to $2.69 on three upward estimate revisions versus none downward, reflecting bullish analyst outlook.

Other Key Factors

Quanta Services is enjoying strong prospects in its electric power segment, fuelled by the need to maintain and replace aging infrastructure, generation mix shifting to more renewable and natural gas, grid modernization and regulation aimed at improving grid reliability. Also, the company’s oil and gas segment outlook looks promising, courtesy of the improving mainline and natural gas distribution, and integrity markets.

Moving ahead, the company is expected to benefit from healthy levels of base load work, including supporting midstream infrastructure, downstream support services and natural gas distribution. However, Quanta Services' operations remain vulnerable to unpredictable weather, the timing of projects and customer budget releases.

In the meantime, AECOM is witnessing robust prospects in all of its segments. Its Construction Services and Management Services businesses continue to benefit from higher margin work in the building construction and power businesses. This apart, the company’s solid backlog levels, which are a key indicator of future revenue growth, indicate significant opportunities in the forthcoming quarters.

Bottom Line

Even though Quanta Services and AECOM carry the same rank, the latter enjoys a lead in terms estimate revisions, valuation and earnings trend.

Key Picks

Investors interested in the same sector may consider also Fluor Corp. (NYSE:FLR) and Owens Corning Inc (NYSE:OC) . While Fluor sports a Zacks Rank #1 (Strong Buy), Owens Corning carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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