Build Your Portfolio With These Three Construction and Engineering Stocks
This week, we use AAII’s A+ Investor Stock Grades to give you insights into three construction and engineering stocks benefiting from the recent $1 trillion infrastructure bill passed by the U.S. Senate. For investors focused on companies that build the backbone for our nation, consider the three construction and engineering stocks of Granite Construction Inc., Installed Building Products Inc. and MYR Group Inc.
Construction and Engineering Companies Poised for Growth With Continued Infrastructure Investments
Infrastructure includes (but is not limited to) roads, railways, airports, public transit and other major projects. As part of President Biden’s “Build Back Better” agenda, the Infrastructure Investment and Jobs Act focuses on investments in physical infrastructure. The Senate approved this bipartisan bill in a 69–30 vote, but the House of Representatives will not take up legislation until the Senate passes a separate, $3.5 trillion budget resolution including priorities such as immigration and childcare.
This package calls for $550 billion in new spending over the next five years. Spending will be primarily financed through unspent emergency relief funds for the coronavirus pandemic as well as strengthened taxes on cryptocurrencies. The Congressional Budget Office (CBO) estimates that the plan will add about $256 billion to projected deficits over the next decade.
The goals of this act include improving and modernizing transportation, repairing roads and bridges, reducing carbon emissions (investments in electric vehicles), increasing internet accessibility and delivering clean drinking water to 10 million families and disadvantaged communities.
Grading Construction and Engineering Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three construction and engineering stocks — Granite Construction, Installed Building Products and MYR Group — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Construction and Engineering Stocks
What the A+ Stock Grades Reveal
Granite Construction (GVA) operates as an infrastructure contractor and a construction materials producer in the U.S. The company operates through transportation, water, specialty and materials segments.
The transportation segment engages in the construction and rehabilitation of roads, pavement preservation, bridges, rail lines, airports and ports. The water segment focuses on water-related construction and water management solutions, as well as storm water rehabilitation services. The specialty segment constructs various complex projects, including infrastructure/site development, mining, public safety, tunnel and power projects; and undertakes bid-build, design-build and construction contracts. The materials segment focuses on production of aggregates, asphalt and construction-related materials, as well as sanitary and storm water rehabilitation products, such as cured-in-place pipe felt and fiberglass-based lining tubes. The company serves federal agencies, state departments of transportation, local transit authorities, county and city public works departments, retailers, homeowners, farmers, brokers and private owners of industrial, commercial and residential sites.
The company has been fortunate to receive many contracts, particularly within the western U.S. These contracts include millions of dollars to redevelop or rehabilitate motorways, airports, interchanges and roads, with most awarded projects coming from the transportation and specialty segments. Committed and awarded projects (CAP) were up $280 million year over year, aiding Granite Construction in reporting revenues of $964 million, dominated by transportation revenue of $525 million.
Over the last month, the consensus earnings estimate for the third quarter has increased from $0.88 to $0.944 per share based on three revisions; two upward revisions and one downward.
Granite Construction has a Momentum Grade of B, based on its Momentum Score of 76, and a weak Growth Grade of D. Granite Construction has a 1.3% dividend yield.
Installed Building Products (IBP) provides installation of insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, closet shelving and mirrors, shower doors and other products for the new residential construction market in the U.S. The company is also involved in installing caulk and sealant products commercially and residentially for basements, crawl spaces and attics, as well as moisture-protection systems.
The market is uncertain due to rising costs for homebuilding. The building products supply chain is still strained, impacting the ability to purchase certain materials. However, the company reported record revenues, net income and earnings per share in the second quarter compared to the same quarter one year ago. The company acquired a Colorado company that installs drywall, framing, ceiling tiles and firestopping for commercial customers, as well as a Louisiana-based mirror and glass installation company within the quarter.
Earnings estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of C, which is considered neutral. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Installed Building Products has a Value Grade of D, based on its Value Score of 61, which is considered expensive. The company’s value score ranking is high across several traditional valuation metrics, with a score of 72 for the price-to-free-cash-flow ratio, 28 for shareholder yield and 40 for the price-to-sales ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings, price-to-book and enterprise-value-to-EBITDA ratios.
Installed Building Products has a Momentum Grade of C, based on its Momentum Score of 52. This means it ranks in the middle tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.
MYR Group (MYRG) is a holding company that, through its subsidiaries, provides electrical construction services in the U.S. and Canada. It operates in two primary segments: transmission & distribution (T&D) and consumer & industrial (C&I).
The T&D segment offers a range of services on electric transmission and distribution networks, as well as substation facilities, including design, engineering, procurement, construction, upgrade, maintenance and repair services. It services high-voltage transmission lines and substations, and low-voltage under- and over-ground distribution systems. This segment serves as a prime contractor to customers, such as investor-owned utilities, government-funded utilities, private developers, independent power producers, independent transmission companies, industrial facility owners and other contractors. The C&I segment provides services, such as design, installation, maintenance and repair of commercial and industrial wiring, as well as installation of traffic networks, bridges, roadways and tunnel lighting. This segment offers its services for airports, hospitals, data centers, hotels, stadiums, convention centers, renewable energy projects, manufacturing plants, processing facilities, waste-water treatment facilities, mining facilities and transportation control and management systems.
The company reported record quarterly revenues and net income of $650 and $21 million, respectively, compared to the same quarter a year ago. Several market drivers provide future growth opportunities, including grid modernization, electrification and clean energy. MYR Group is focused on strategies to expand customer relations, innovative practices and capitalize on market opportunities.
MYR Group has an average A+ Growth Grade of B. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow.
The company has exhibited strong sales growth over the past year. Sales increased 26.7% year over year for the three-month period ending June 30, 2021, to $650 million, while diluted earnings per share grew 55.2%. MYR Group currently does not pay a dividend.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
MYR Group has a Quality Grade of A, putting it in the top tier among all U.S.-listed stocks.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks highly in terms of its return on assets and F-Score, ranking in the 81st and 86th percentile of all U.S.-listed stocks, respectively. However, it ranks poorly in terms of its change in buyback yield, putting it in the 50th percentile.
MYR Group has a Momentum Grade of A, based on its Momentum Score of 85.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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