Engineering and construction [E&C] stocks currently mean a little something differently in the U.S. than they do globally. Namely, in the U.S. we currently associate E&C with the sluggish housing market, while globally it is associated with rapid growth, particularly in China and India. We sat down with Zacks senior E&C analyst
John Nelson Simon for his take on the companies within his coverage.
To what extent are engineering and construction stocks struggling due to the current problems in housing and real estate in general?
Some of the E&C stocks are struggling, that's true, but it's not so much from the housing and real estate debacle as it is from management decisions regarding acquisitions or other internal affairs. There still is strong demand for plants and equipment that have to do with power generation and hydrocarbons, as China and India continue to expand, perhaps more slowly, but expand nevertheless. Also, there still is a lot of activity in Iraq, which probably will continue for awhile.
I publish on five companies that fall into a broad definition of E&C and have BUY recommendations on four of them: AAON Inc. (AAON), ABB Ltd. (ABB), Chicago Bridge & Iron (CBI) and URS Corp. (URS). The fifth is Foster Wheeler (FWLT), on which I have a HOLD.
Do you expect business to start picking up soon? This year or maybe next year?
I have heard that bidding activity is picking up again, which would indicate that things might get better towards the end of this year on quick-turn-around projects, but probably next year for the larger programs. The population of the planet keeps expanding and people in places like China, India and elsewhere are becoming more affluent...at least by their standards.
How would you advise investors play the current market for the near term?
I tend to use this rule of thumb, and it rarely ever fails. It may sound glib to some, but trust this: buy good companies on bad news...and there always is bad news.
Any other things we should keep in mind at this time?
Stay away from companies with excessive exposure to the turmoil in the Middle East. Not only does the market tend to loathe uncertainty - and our situation with countries like Iraq and Afghanistan are far from certain - but the presidential election in November of this year could bring a significant change in strategy. This would likely affect all companies that currently do business in the region now.
John Nelson Simon is a senior analyst covering companies in the global engineering and construction industry for Zacks Equity Research.
