In 2023, the construction sector was battered by inflation which presented itself in form of material cost volatility and higher labor costs. However, after two years of rising inflation and interest rates, construction spending is likely to increase in 2024.
Yet, the construction sector did show some growth in 2023, but that single digit growth came from inflation. That’s a double-edged sword. First, there’s only so much cost that companies can pass along. And second, elevated prices can cause would-be customers to delay new projects.
Help may come from the Federal Reserve cutting interest rates. While the timing and scope of those cuts has yet to be determined, they could jump start an industry that’s poised for growth.
In the meantime, government spending is likely to provide a catalyst for construction spending. Money from the Infrastructure Act started to make its way into the economy. That should be one catalyst for higher spending. Another will come from the Chips Act which encourages semiconductor manufacturers to onshore at least a portion of their manufacturing operations.
All of that may make construction stocks appealing. Here are three that can satisfy an appetite for growth and value.
KBR (NYSE:KBR) provides scientific, technology, and engineering solutions to government and commercial customers around the world. The company’s two divisions are Government Solutions and Sustainable Technology Solutions. That should peak your interest.
And when you dive a little deeper, you see that the company does business in many key areas that will drive construction spending in 2024. This includes space, aerospace and defense, not to mention renewable and sustainable energy solutions.
Therefore, the company’s revenue and earnings are unremarkable. And its dividend yield of around 1% isn’t particularly exciting even though KBR has increased it in each of the last four years.
But when you look ahead, the story gets more interesting. KBR is showing strong organic growth with a strong backlog of projects, currently over $21 billion between the two divisions. That’s significantly higher than the approximately $7 billion in revenue the company will post in 2024.
With a valuation of 18.5x forward earnings, the stock is not currently pricing in the company’s forecast for 11.5% earnings growth. But, analysts believe it will and give the stock a $67.03 consensus price target that implies 25% capital appreciation.
Howmet Aerospace (HWM)
One company’s pain is another company’s gain.
That could summarize the recent price action with Howmet Aerospace (NYSE:HWM). The company reported earnings in early January. The report coincided with the news that a Boeing (NYSE:BA) 737 Max 9 jet was forced to make an emergency landing shortly after an Alaska Air Group Inc. (NYSE:ALK) flight took off.
Boeing is still reeling from the aftermath. But in that same timeframe, Howmet’s stock is up more than 8% and continues to push to new all-time highs. That must bring a smile to the face of analysts at Truist Financial (NYSE:TFC) who gave the stock a $74 price target after the earnings report.
Howmet Aerospace forecasts 21.9% earnings growth that would take earnings from $1.78 to $2.17 a share. But at 33x forward earnings, the stock price is not accounting for that growth.
Approximately 23% of HWM’s revenue comes from its commercial aerospace segment which supplies titanium products used in various components for Boeing and Airbus. That supports the company’s earnings outlook and room for the stock price to move higher.
For many investors the housing sector is one of the first places your mind goes when you think about construction spending. Mine did, too. That’s a good reason to look at Weyerhauser (NYSE:WY). The company is one of the world’s leading lumber companies with 12.4 million acres of land open for logging in the United States.
However, it’s not hard to see how Weyerhauser would be affected by inflation and high interest rates. Nevertheless, WY stock has been trading in a defined range for about a year. It seems that the strength in the homebuilding sector has put a floor on the stock. At the same time, the stagnant housing market is keeping a ceiling on WY stock as well.
But if the Federal Reserve, as expected, lowers interest rates, it may jumpstart the housing sector. That would likely be enough to push the stock above the $35 level that has been acting as resistance and close to the consensus analyst price target of $37.88.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.