Signs Of A Recovery In The Construction Market

by: Stone Fox Capital

Last week, the market presented some major signs of the beginning stage of a recovery in the construction sector. First, railroad shipments of lumber and crushed stone increased dramatically. Second, PPG Industries (PPG) reported blowout earnings in part due to a recovery in the US construction market.

While most construction related stocks have already had a run, most are no where near multi year highs.

Several options exist for playing the construction recovery. The main debate is whether to focus on US based companies that will benefit solely from the rebound in US construction or globally based companies that will benefit from the largest two economies (US and China) rebounding at the same time.

The main benefactors will be the tool, materials, and equipment sectors. Below are some companies that will benefit from this trend. In some cases, the regional revenue breakout is not as key as to how the market trades the stock.

US Focused

Snap-on Inc (SNA)

This company provides tools, equipment, diagnostics, repair information, and systems solutions for professional users.

At a market value of $3.4B, the stock trades for about 10% forward earnings. This equates to roughly equal the 5 year growth rates so the stock is cheap compared to the market. It has also beat earnings by an average of 10% over the last 2 quarters so the likelihood exists that earnings remain too low.

Stanley Black & Decker (SWK)

This company provides power and hand tools, mechanical access solutions, and electronic security systems primarily in North America and Europe focusing on the construction and do-it-yourself segments. The Stanley and Black & Decker brands are well known domestically.

At a market value of $12.9B, the stock trades for a little over 11x forward earnings. Considering an expected 5 year growth rate of 12.6%, this stock is considerably cheaper than the market.

Earnings estimates have been dropping over the last 90 days which is a concerning sign, but several stocks that have reported Q1 already have easily beat such scenarios.

Vulcan Materials (VMC)

This company engages in the production and sale of construction aggregates of crushed stone, gravel, and sand, as well as asphalt mix, ready-mixed concrete, and cement primarily in the United States.

At a market value of $5.4B, this stock isn't cheap considering the limited earnings expected next year. The company is very leveraged to a rebound in housing and that leverage will show up in earnings if a recovery happens. Earnings estimates continue to creep up for 2013, but with expectations just recently turning positive the stock still trades some 65% below the previous cycle peak around $120.

The story is a little convoluted with the Martin Marietta (MLM) hostile bid though Vulcan appears ready to fight to remain independent. See Wednesday's Bloomberg report. Any official ending of the bid could send the shares temporarily lower creating a potential buying opportunity.

Global Focused

Freeport McMoran Copper & Gold (FCX)

Freeport engages in the exploration, mining, and production of mineral resources. The company primarily explores for copper, gold, molybdenum, cobalt, and silver. It operates several mines including the Grasberg in Indonesia and Tenke Fengurume in the Congo.

This company is known as the proxy for copper and hence trades with the copper spot price.

At a market value of $34B, this stock trades at a very subdued 6x forward earnings. Naturally, earnings will be based as much on copper prices as production efficiency or expansion.

Copper, along with met coal, are a couple of the materials that haven't faced supplying a fast growing China economy along with a growing construction market in the US. Remember, China was considerably smaller when the US last saw a robust market in 2007.

Alpha Natural Resources (ANR)

Alpha Natural engages in producing, processing, and selling steam and metallurgical coal in the US. It owns or leases approximately 4.7B tons of proven and probable coal reserves including one of the larges met coal reserves in the world. It operates 145 mines in northern and central Appalachia and the Powder River basin.

At a market value of $3.2B, the company trades around a historical low compared to sales. Earnings are currently under pressure due to the weak steam coal market in the US. As the market gets right sized, expect a significant rebound in margins.

Ultimately though, this company is a proxy on world demand for met coal. As with copper, it will be interesting to see how supply is able to handle the demand increase in the US along with a robust China.

Terex (TEX)

Terex manufactures capital goods machinery products worldwide under the Terex and Genie brands amongst others. The company focuses on four main areas: aerial work platforms, construction, cranes, and material handling and port solutions.

At a market value of $2.4B, the stock trades at a compelling value of less than 8x forward earnings and .3x revenue.

While most investors prefer Caterpillar (CAT) in the sector, the companies have realigned in the last couple of years to where Caterpillar is much more focused on the mining sector that thrived in 2011 while Terex shed the mining division to be more focused on construction. This makes Terex much more levered to a construction recovery.


Whirlpool (WHR)

This company manufactures home appliances such as washers, dryers, refrigerators, freezers, dishwashers, and other portable household appliances worldwide. It markets and distributes its products under various brand names, including Whirlpool, Maytag, KitchenAid, Jenn-Air, amongst numerous other brands.

At a $5.5B market value, Whirlpool trades close to 1x its growth rate.

The company qualifies as a wildcard because appliance demand will likely jump with increases in construction whether residential or not. Anybody with a new house or office building will need new appliances. With a strong focus on Latin America besides the US, Whirlpool has the ability to benefit from a global rebound in construction.

Sears Holdings (SHLD)

This company operates as a specialty retailer in the US and Canada. It owns numerous brands including DieHard, Lands End, and most importantly Craftsman and Kenmore. It operates over 4,000 stores between the two countries.

At a $6.2B market value, Sears trades at one of the lowest price to sales ratios in the industry.

The company qualifies as a domestic wildcard since a substantial amount of its revenue comes from the brands like Kenmore and Craftsman that benefit from a booming appliance market and home improvements. Most investors have missed that a major contributor to the downturn in Sears revenue came from the reduced demand for Kenmore appliances.


Not all of these companies will benefit equally from a rebound in construction, but some of them will be huge winners from a pending rebound in that sector.

Disclosure: I am long ANR, FCX, SHLD, TEX.