Voya Financial (VOYA) Q3 Earnings and Revenues Top Estimates

Analysts are divided on the outlook for the construction sector this year, although they tend to agree on some of the challenges and opportunities.

Construction Sector: One-Year Price Performance

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Most agree, for example, that supply chain issues could continue to play up this year as well, with raw material costs escalating.

They also think that skilled labor will still be hard to come by, partly because of the stigma attached to blue collar jobs. With the workforce continuing to retire early and not enough new talent taking their place, there’s no easy way to fill the gap. By one estimate, the average age of construction workers is around 42.5 years right now. Therefore, there’s much to be concerned about.

Then, of course, we have persistent inflation exacerbated by higher oil prices. And if the Fed keeps raising rates, a recession becomes more likely. Higher rates are a double whammy for homebuilders because it not only puts further pressure on consumers but also has the effect of increasing mortgage rates that directly affect a person’s ability to buy.

A sticky supply chain, and uncertain raw material and fuel costs, push up project costs, and when demand is also under pressure, these costs are harder to pass on. Therefore, margins come under pressure.

Where’s the Money Then?

While the supply constraints apply to the non-residential market just as much as they do to the residential side, demand-side pressures are entirely a different kind.

The U.S. government is committed to infrastructure improvements, which makes this a relatively good year for civil and infrastructure work. This kind of work is also likely to generate more stable revenue and the projects are likely to be longer-term.

Some activity is also likely to move away from new construction to repair/rehabilitation projects. One trend that appears to be secular, for example, is the tendency to buy things online rather than in the malls. The declining traffic is making large commercial projects in brick-and-mortar shopping less and less viable, with many of them likely to be converted for other purposes.  

According to Wells Fargo’s 2023 Construction Industry Forecast, based on a survey of current business conditions in the construction industry, there is “cautious optimism” among nonresidential contractors and distributors. The survey shows that while more than 50% of contractors expect to rent the same amount of heavy construction equipment in 2023, purchases will depend on the level of demand (more orders/backlog), and only if costs permit. Distributors, on the other hand, are renting the same or more equipment than a year ago with fleet utilization at 70%.

However, the words of James Heron, national sales manager for the Wells Fargo Equipment Finance Construction Group, “Despite a number of market variables, the level of optimism reflected in the 2023 forecast survey confirms industry leaders maintain a deep-seated belief in economic recovery.” Therefore, what happens in case of a recession remains a grey area, as may be expected.

A ResearchAndMarkets report states that the industry will expand 6.1% this year and growth at a CAGR of 5.2% from 2023 through 2027. In addition to the housing weakness and other challenges mentioned above, the report mentions delays in hyper-scale data center construction projects in 2023 as a result of the economic impact on tech players. It expects government infrastructure building to support the market this year.

Here are a few stocks worth buying today:

United Rentals, Inc. (URI)

United Rentals is the largest equipment rental company in the world, with an integrated network of 1,521 rental locations in United States, Canada and Europe. Moreover, it operates in 49 states and every Canadian province. The company offers 4,600 classes of equipment for rent at a total original equipment cost (“OEC”) of $19.6 billion (as of December 2022).

The Zacks Rank #2 (Buy) stock with Value, Growth and Momentum Scores of A, B and A, respectively is expected to see 2023 revenue and earnings growth of 20.8% and 29.5%, respectively. 2024 revenue and earnings are expected to grow 4.0% and 9.1%. The 2023 estimate has increased 82 cents in the last 60 days while the 2024 estimate increased 56 cents.

EMCOR Group, Inc. (EME)

EMCOR Group is one of the leading providers of mechanical and electrical construction, industrial and energy infrastructure, as well as building services for a diverse range of businesses. The company serves commercial, industrial, utility and institutional clients.

The Zacks Rank #2 stocks with a Value Score of B and Growth Score of A is expected to grow its revenue and earnings a respective 9.2% and 12.2% this year. In 2024, revenue is expected to grow 3.2% while earnings grow 13.9%.

One Month Price Performance

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