Three Stocks Engineering to Succeed in Construction
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three construction and engineering stocks. With the infrastructure sector laying the groundwork for growth, should you consider the three stocks of Comfort Systems USA Inc. (FIX), Emcor Group Inc. (EME) and Valmont Industries Inc. (VMI)?
Construction & Engineering Stocks Recent News
As the 2024 presidential election approaches, stock market volatility — as indicated by the Chicago Board Options Exchange (CBOE) Volatility index (VIX) — has surged to its highest levels since April 2024. This spike reflects the market’s uncertainty around earnings season and anticipation regarding the election’s outcome.
As of July 24, 2024, the Invesco Building & Construction ETF (PKB) is up 7.8% year to date, reflecting strong investor interest in the industry. Companies like Comfort Systems USA, Emcor Group and Valmont Industries appear well positioned to leverage current trends. These firms might see opportunities for growth, making them worth monitoring for investors interested in the evolving construction and engineering landscape.
Grading Construction & Engineering Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate 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 — Comfort Systems USA, Emcor Group and Valmont Industries — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Construction & Engineering Stocks
What the A+ Stock Grades Reveal
Comfort Systems USA Inc. (FIX) provides contracting services, operating through two segments: mechanical and electrical. The mechanical segment includes heating, ventilation and air conditioning (HVAC), plumbing, piping, controls, off-site construction, monitoring and fire protection. It also handles piping and ducting installations. The electrical segment focuses on installing and servicing electrical systems. The company builds, installs, maintains, repairs and replaces mechanical, electrical and plumbing systems across its 44 operating units in 172 U.S. locations. It offers engineering, design-assist and turnkey construction services for advanced technology, power, commercial and industrial sectors.
Comfort Systems USA has a Momentum Grade of A, based on its Momentum Score of 88. This means that the stock’s momentum is very strong in terms of its weighted relative price 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, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 60, 94, 82 and 64, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 10.9%.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 through 2019.
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 to assets, 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.
Comfort Systems USA has a Quality Grade of A, based on a score of 83, which is very strong. The company ranks strongly in terms of its return on assets and F-Score. Its return on assets of 10.9% ranks in the 90th percentile among all U.S.-listed stocks, and its F-Score of 7 ranks in the 85th percentile. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. Comfort Systems USA also has a buyback yield of 0.2%, which is above the sector median of –0.4% and ranks in the 73rd percentile.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. The company’s Growth Grade is A, which is very strong. Comfort Systems USA has generated positive annual cash from operations in the past five consecutive years and has a five-year annualized sales growth rate of 19.0%.
Emcor Group Inc. (EME) is a specialty contractor in the U.S., offering electrical and mechanical construction, facilities services, building services and industrial services. The company serves various sectors — including commercial, technology, manufacturing, industrial, health care, utility and institutional customers — through approximately 100 operating subsidiaries. These subsidiaries are organized into five segments: U.S. electrical construction and facilities services, U.S. mechanical construction and facilities services, U.S. building services, U.S. industrial services and U.K. building services. Emcor Group’s subsidiaries provide comprehensive and diverse solutions related to construction, operation, maintenance and facility management.
The company has a Value Grade of D, based on its Value Score of 39, which is expensive. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA).
The company has a shareholder yield of 1.6%, ranking in the 33rd percentile. Its price-to-free-cash-flow ratio is 17.2 and its price-earnings ratio 24.3, ranking in the 45th and 61st percentiles, respectively. The enterprise-value-to-EBITDA ratio is 14.2, ranking in the 64th percentile.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Emcor Group has an Earnings Estimate Revisions Grade of B, based on a score of 80, which is positive. The grade is based on the statistical significance of its latest 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.
Emcor Group reported a positive earnings surprise of 47.1% for the first quarter of 2024, and in the prior quarter reported a positive earnings surprise of 26.0%. Over the last month, the consensus earnings estimate for the second quarter of 2024 has remained unchanged at $3.758 per share. Over the last month, the consensus earnings estimate for full-year 2024 has increased from $16.214 to $16.249 per share, based on one upward revision.
Emcor Group has a Growth Grade of A, which is very strong. The company ranks in the 86th percentile for its five-year annualized sales growth rate of 9.1%.
Valmont Industries Inc. (VMI) manufactures products and provides services for infrastructure and agricultural markets. The infrastructure segment includes the manufacture and distribution of products and solutions for utility, solar, lighting, transportation and telecommunications infrastructure markets, as well as coating services to protect metal products. This segment comprises five primary product lines: transmission, distribution and substation; lighting and transportation; coatings; telecommunications; and solar. The agriculture segment involves the manufacture of center-pivot and linear irrigation equipment for agricultural markets, including parts, tubular products and advanced technology solutions for precision agriculture. The company manufactures and distributes mechanical irrigation equipment and related service parts under the Valley Irrigation brand name.
Valmont Industries has a Quality Grade of A, with a score of 93, which is very strong. The company ranks strongly in terms of its buyback yield and its Z-Score, which measures bankruptcy risk. Its buyback yield of 5.1% ranks in the 91st percentile among all U.S.-listed stocks, and its Z-Score of 9.22 ranks in the 88th percentile. Valmont Industries has a gross income to assets of 35.6%, above the sector median of 23.1%, and an F-Score of 7.
Valmont Industries has a Value Grade of C, based on a score of 45, which is average. The company ranks in the 14th percentile for its shareholder yield and in the 32nd percentile for its enterprise-value-to-EBITDA ratio. The company has a shareholder yield of 6.0% and an enterprise-value-to-EBITDA ratio of 7.8. A lower price-to-sales ratio is considered better value, and Valmont Industries’ price-to-sales ratio of 1.37 is below the sector median of 1.39. The price-to-free-cash-flow ratio is 34.2, which ranks in the 71st percentile.
The company has a Momentum Grade of B, based on its Momentum Score of 66. This means that the stock’s momentum is strong in terms of its weighted relative price strength over the last four quarters. The ranks are 87, 39, 34 and 45, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 0.1%.
Valmont Industries has a Growth Grade of A, which is very strong. The company ranks in the 86th percentile with its five-year annualized sales growth rate of 8.7%.
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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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