Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Investment Strategist
Summary: In today's equity note we show a basket of 30 US construction related stocks that could benefit from the potential new $1trn infrastructure plan by the Trump administration. This basket of stocks is high beta to the S&P 500 but has historically outperformed S&P 500. The basket has a lower net-debt-to-EBITDA than the market highlighting the industries' prudent financial management and valuations are generally in line with the market.
Last week’s rout in US equity markets was particular tough with US infrastructure related stocks down 9.6% but this week the group has staged a 3.4% comeback on the news that the Trump administration is preparing a $1trn infrastructure plan to boost the economy. We have created a basket of 30 US construction related stocks across different industries that could get a boost from such an infrastructure plan.
Name | Sector | Industry | Mkt. Cap. | Return YTD (%) | EV/EBITDA | Net-debt-to-EBITDA | Chg. Est. EPS 1m (%) |
Johnson Controls International plc | Industrials | Building Products | 25,819 | -13.4 | 13.6 | 1.3 | -0.2 |
Carrier Global Corp | Industrials | Building Products | 18,406 | N/A | N/A | N/A | 0.3 |
Masco Corp | Industrials | Building Products | 12,729 | 1.2 | 10.9 | 1.5 | 6.4 |
Lennox International Inc | Industrials | Building Products | 8,608 | -7.4 | 14.3 | 2.1 | -0.1 |
Fortune Brands Home & Security Inc | Industrials | Building Products | 8,629 | -3.5 | 12.0 | 2.3 | -0.3 |
A O Smith Corp | Industrials | Building Products | 7,723 | 1.7 | 14.6 | -0.3 | 1.9 |
Trex Co Inc | Industrials | Building Products | 6,940 | 33.5 | 30.0 | 0.3 | 0.6 |
Owens Corning | Industrials | Building Products | 6,016 | -13.6 | 25.3 | 2.2 | 2.3 |
AZEK Co Inc/The | Industrials | Building Products | 4,507 | N/A | N/A | 6.0 | N/A |
Armstrong World Industries Inc | Industrials | Building Products | 3,630 | -18.9 | 10.1 | 0.8 | -0.5 |
Simpson Manufacturing Co Inc | Industrials | Building Products | 3,651 | 5.1 | 14.2 | -0.5 | 0.0 |
Advanced Drainage Systems Inc | Industrials | Building Products | 3,483 | 29.1 | 131.4 | 3.1 | 24.0 |
Jacobs Engineering Group Inc | Industrials | Construction & Engineering | 11,077 | -4.8 | 16.0 | 1.9 | 0.4 |
AECOM | Industrials | Construction & Engineering | 6,227 | -9.8 | 19.7 | 1.7 | 2.2 |
Quanta Services Inc | Industrials | Construction & Engineering | 5,299 | -5.6 | 7.4 | 1.6 | -0.8 |
EMCOR Group Inc | Industrials | Construction & Engineering | 3,426 | -27.4 | 6.3 | 0.7 | -1.1 |
MasTec Inc | Industrials | Construction & Engineering | 3,165 | -33.1 | 3.8 | 1.3 | 2.4 |
Valmont Industries Inc | Industrials | Construction & Engineering | 2,404 | -24.5 | 8.6 | 1.6 | -1.1 |
Caterpillar Inc | Industrials | Machinery | 69,057 | -12.2 | 7.1 | 0.3 | 1.5 |
Illinois Tool Works Inc | Industrials | Machinery | 53,863 | -4.4 | 15.8 | 1.6 | -1.5 |
Deere & Co | Industrials | Machinery | 48,452 | -10.1 | 7.4 | 0.5 | 1.5 |
PACCAR Inc | Industrials | Machinery | 25,746 | -5.0 | 6.1 | -1.2 | 2.0 |
Otis Worldwide Corp | Industrials | Machinery | 24,898 | N/A | N/A | N/A | -0.1 |
Cummins Inc | Industrials | Machinery | 25,261 | -2.8 | 8.3 | 0.5 | -0.4 |
Fortive Corp | Industrials | Machinery | 22,967 | -10.6 | 19.4 | 2.9 | 0.3 |
Stanley Black & Decker Inc | Industrials | Machinery | 21,078 | -16.6 | 14.1 | 2.5 | 5.7 |
Dover Corp | Industrials | Machinery | 14,013 | -14.7 | 12.6 | 2.1 | 0.0 |
Ingersoll Rand Inc | Industrials | Machinery | 12,239 | -19.9 | 44.0 | 5.4 | 0.5 |
Xylem Inc/NY | Industrials | Machinery | 11,948 | -15.1 | 18.3 | 1.6 | -1.1 |
IDEX Corp | Industrials | Machinery | 11,543 | -10.4 | 17.9 | 0.8 | -0.3 |
Source: Bloomberg and Saxo Group
The basket as a whole is down 8% year-to-date on an equal-weighted basis which is in line with the S&P 500. These construction related stocks have generally a low market capitalization except for the machinery companies which are most likely more global in their business footprint. The average net-debt-to-EBITDA is only 1.6x compared to 1.9x for the S&P 500 indicating a lower leverage which means lower default risk all things equal. The basket’s equal-weight valuation is equal to the S&P 500 if Advanced Drainage Systems is excluded from the calculation. The blended 12-month EPS estimates are up on average 1.5% the past four weeks which also mimics the S&P 500. If the Trump administration’s infrastructure plan materializes we would expect estimates to drastically improve.
An alternative to our custom basket is the Invesco Dynamic Building & Construction ETF (PKB:arcx) which holds 30 US-listed companies engaged in providing construction and related engineering services for building residential/commercial/industrial properties, or large infrastructure projects.
Measured since 1 January 2015 our basket of 30 stocks (equal-weighted) has done better than the S&P 500 but with a higher beta which makes sense since this industry is pro-cyclical. The high downside beta is also evident in the fact that this group of stocks experienced a 70% drawdown compared to only 32% in the S&P 500.
Besides the potential infrastructure plan by the Trump administration the current Fed policy has pushed down interest rates including the US 30-year fixed mortgage rate which hit a record 3.13% for the week ending 18 June. This is a direct positive factor for the construction sector and as such should help lift earnings and the outlook for these stocks.