While the rest of the market has been on a tear for the first part of the year, one sector that has particularly underperformed has been heavy construction companies. As a contrarian investor, that translates to stock profit opportunity and I’ve identified several appealing purchase options here.
The heavy construction sector, as a whole, is slightly underwater for the year to date, and the stocks below are down an average of ten percent. Part of this underperformance may be related to the weakness in metal and mining stocks. Among other things, all of these sectors appear to be weighed down by concerns about a near-term slowdown in China.
Longer-term, the fundamentals for this sector look pretty favorable. In the U.S., the real estate markets appear to be recovering, and in the public sector there is growing awareness of our need to rebuild our infrastructure. Globally, all of the emerging markets are likely to need extensive heavy construction in the years to come.
The stocks below are in different aspects heavy of heavy construction or machinery. They have all been under pressure recently, but have good long-term prospects. If you like these investment options, I recently profiled an additional five stock profit opportunities within the heavy construction sector.
Aegion (AEGN), formerly Insituform, is usually known as a sewer pipeline company, specializing in to rehabilitating pipes with minimal disruption. And though more than 90% of the company’s revenues are still related to pipelines, under a new CEO Aegion has pursued larger projects in the role of project manager. The expanded scope of operations and international reach (17% of 2012 revenues were from emerging markets, up from less than 3% five years ago) bode well for the firms’ future. A new $10 million stock repurchase program could dampen the stock’s near-term volatility.
Caterpillar (CAT) has developed one of the strongest brands in the heavy construction industry. Its operations span the globe with roughly two-thirds of sales outside North America. The stock has underperformed since early 2012 and made no net progress since 2006. A surge in mining activity that helped in 2010 and 2011 is now providing a headwind, as are general economic concerns about Europe and China. But management is responding by managing production schedules and cutting costs. The stock’s valuation and yield both look attractive.
CNH Global (CNH) sells agricultural and construction equipment worldwide from its base in Amsterdam. While its construction operations are facing the same industry headwinds as its competitors, its agricultural division is showing signs of strength. Fiat owns about 87% of CNH and has announced plans to merge CNH with Fiat’s industrial unit to form a new company CNH Industrial N.V. The combined companies will be a strong worldwide competitor.
Fluor (FLR) is one of the world’s largest construction companies. The energy sector has been a bright spot for the company recently, helping offset challenges in the mining sector. Fluor also derives 44% of sales from industrial and infrastructure projects, which positions the company to benefit from future public sector infrastructure spending. The balance sheet is outstanding, and operations throw off strong cash flow.
Heavy Construction; Ready to Lift a Portfolio’s Performance?
Company Symbol Recent Price 7-Year Range Market Cap. Mil. Price to Sales Debt to Equity
Aegion AEGN 22.67 30.00-9.26 865 0.81 0.36
Caterpillar CAT 82.96 116.95-21.71 54,540 0.86 2.21
CNH Global CNH 42.12 70.00-5.69 10,240 0.49 2.09
Fluor FLR 59.73 101.36-28.60 9,730 0.34 0.14