The Only Construction Stock To Own

Now really isn’t the time to get involved with construction companies.

Since the beginning of 2007, the construction services industry is down 56% earning the “honor” of actually performing worse than the S&P 500 has in the last two years. And when you dig deeper into the numbers, it’s no surprise…

The housing crash was a seriously bad situation for the construction industry worldwide. From 1995 to 2005, builders had experienced almost 10% annual growth as consumers built new homes, remodeled, and upsized their living spaces. That all changed in 2006 when the market for homes collapsed, drying up lenders who had been quick to write loans consumers couldn’t afford.

It was the loans that were fueling the impressive growth in construction.

In the year that followed housing’s peak, the construction market shrunk almost 20%. After all, who could afford to put in a new pool or build that vacation home when we were on the cusp of a recession?

But this isn’t a sob story… there are investment opportunities in the construction market yet…

In his book The Future for Investors, Wall Street guru and Wharton professor Jeremy Siegel suggests that some of the best investment returns can come from finding good opportunities in bad industries.

And if there was ever a bad industry right now, construction is it…

That’s not to say that construction is bad in total – no, that’d be painting with too broad of a brush. The money to be had today is in commercial construction.

Even though residential construction companies have suffered, commercial construction is actually predicted to hold its own in 2008. That’s largely because commercial construction projects aren’t the product of wanting a bigger master suite or a new pool – commercial construction is done for one very good reason: because it has to be.

Building a new manufacturing plant or constructing a new office building aren’t electives for most companies; they’re projects that need to be completed to make money. This year many companies are investing heavily in their plant, property, and equipment because of the deals they can get.

After all, building a warehouse is a lot cheaper when the builders need work and oil costs less than $50 per barrel.

Political Profits

But that’s not the whole story. According to a recent CNN Money article by Steve Hargreaves, there are plans underway to stimulate the economy through a public works program – a New Deal of sorts – that would inject hundreds of billions into the economy to construct new infrastructure like highways, power plants, and schools.

“Details on the plan are few. Numbers tossed around range anywhere from $300 billion to $700 billion, and include other measures aimed at stimulating the economy such as tax cuts and money for businesses,” says Hargreaves.

And who’s going to build all of that stuff? Commercial builders are, of course.

Of all the commercial construction companies out there, EMCOR Group (NYSE:EME) stands alone. The company’s businesses include electrical and mechanical construction as well as facilities management services for customers in virtually ever sector of the economy.

So, what exactly do they do?

Their electrical construction arm designs and installs electrical and lighting systems, fire alarm, security and process control systems, voice and data communications systems, roadway and transit lighting, and fiber optic lines. On the mechanical side are heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems, plumbing, process and high-purity piping systems, water and wastewater treatment systems, and central plant heating and cooling systems.

EMCOR isn’t a niche player either. With revenues expected to exceed $6 billion in 2008, EME is a Fortune 500 company that employs 30,000 people worldwide.

Rhino Stock Report readers got in 26% ago at $15.31, but right now EMCOR is still a bargain stock at $19.30. The company is trading at a book value of 0.97, meaning that its liquidation value is bigger than its share price – that means that investors are undervaluing this company because they’re scared of construction stocks. That’s a big mistake…

EME isn’t your average contractor. Between 1997 and 2007, EMCOR’s business grew an average of 26% annually. That means that even including the year after the real estate market bust, EMCOR performed more than twice as well as the rest of the construction industry did on its best years.

Building their Business in Tough Times

EMCOR isn’t just profiting from companies who want to build right now, it’s investing serious money into its business as well. Last year, the company spent half a billion dollars to build its business during these tough times. The reason is simple… EME has the cash.

EMCOR’s balance sheet is perfect for this market. With more than $340 million in cold hard cash on hand, the company has enough scratch to buy back all of its debt, and then have $140 million left to play around with. The company also grew its income by 46% last year to $127 million, marking more than 50 consecutive quarters of profitability. These guys aren’t going anywhere anytime soon.

At its current price, EME is a fantastic bargain that could easily be a $30 stock when the market rebounds.

Disclosure: EME is a long position in the Rhino Stock Report’s model portfolio.

Comments

[billp37:]

Future new construction may have to be limited for water and energy shortage considerations?

www.prosefights.org/ab...

2008 Dec 12 10:30 AM

[Jonas Elmer...:]

That's true, though I don't think that those shortages are going to be the limiting factor in construction for the near term (in most places). Right now, capital shortages are the real problem the industry is facing.

2008 Dec 12 11:33 AM

[Joe Lucid:]

For the true microcap investor there's another one: entx. Selling at 0.2 x book. A ton of NOLs to use in the future that are fully reserved. Huge operating improvements have been masked by write-offs on bad investments entered under the old management team.

There's an asbestos liability that makes this stock look bad. But if you do the math the intrinsic value distribution looks really favorable vs stock price. Company also has a odd lot tender offer in the works that would purchase up to 500 stocks per account for 35c a piece if approved by shareholders. That's more than a 100% premium over recent prices, but still about half of what I would consider the floor to a fair price.

2008 Dec 12 06:33 PM

[raytayzmd:]

...hmmmm, I think I'll wait to get bullish until AFTER I see a precipitous decline in the number of stock market advisory newsletters being proffered...

2008 Dec 16 12:55 PM