Construction Sector Earnings: What to Expect Amid Mixed Signals

The construction industry is navigating a complex landscape influenced by a mix of positive and negative factors. On the upside, increased investment in infrastructure, rising demand for energy-efficient projects, a boost in housing demand, and efforts to improve operational efficiency are expected to support growth. Conversely, persistent mortgage rates hovering between 6% and 7%, seasonal fluctuations, ongoing inflationary pressures, and rising costs for materials, labor, and land could weigh heavily on profitability.

Several key firms in the construction sector, including Watsco, Inc. WSO, Fluor Corporation FLR, Vulcan Materials Company VMC, Toll Brothers, Inc. TOL, and Tri Pointe Homes, Inc. TPH, will announce their quarterly earnings tomorrow.

Check the Zacks Earnings Calendar for the latest market news.

Looking at the broader Construction sector, as of February 12, 85.7% of the 345 S&P 500 companies had provided their earnings reports. These firms, which comprise 84.6% of the sector’s market capitalization, showed a 3% decrease in profits while their revenues saw a slight increase of 0.1%. Among the companies that reported earnings, 75% exceeded expectations, and 66.7% surpassed revenue forecasts.

What’s Ahead for Construction Sector Earnings?

According to the latest Earnings Trends report, the construction sector is expected to experience a 1% earnings decline in the fourth quarter, somewhat better than the 1.8% drop reported in the third quarter of 2024. Revenue growth is projected at 1.6%, reflecting a deceleration from the 2.3% growth rate seen previously.

Key Growth Factors in the Construction Sector

The United States is benefiting from increased infrastructure investment through various federal initiatives, such as the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). These programs are helping companies involved in public construction, engineering, and low-carbon projects, leading to a growing backlog of work. In addition, strong performance in environmental remediation and national security sectors further bolsters this growth.

Amid persistent inflation, companies are focusing on operational efficiencies through cost-cutting measures, which help mitigate the impact of rising costs. This strategy is evident in the decreasing estimates for quarterly losses.

Housing market challenges persist, with homebuilders taking creative actions, such as offering incentives and reducing average selling prices, to encourage new home orders amid a difficult market environment.

Challenges Facing the Construction Sector

Despite strategies to lift housing demand, high mortgage rates, swinging between 6% and 7%, continue to stifle growth. While buyers are slowly adapting to these rates, affordability remains a major issue in many regions.

Moreover, ongoing inflation is straining the cost structures of construction firms. Rising labor and material expenses, alongside high operating costs, continue to pressure company profit margins, despite efforts to enhance operational efficiencies.

Additionally, seasonal weather patterns pose challenges, particularly for businesses involved in the distribution of heating and air conditioning equipment alongside construction projects.

Construction Stocks Worth Watching

Investors looking to pinpoint stocks that might outperform earnings expectations can use the Zacks methodology. This approach emphasizes a positive Earnings ESP (Expected Surprise Prediction) alongside a strong Zacks Rank (Rank #1: Strong Buy, Rank #2: Buy, or Rank #3: Hold) to improve the probability of a successful earnings report. Utilizing the Earnings ESP Filter can help uncover promising stocks.

Here is a list of five notable stocks set to report their earnings on February 18.

Watsco: This HVAC distributor holds an Earnings ESP of +0.94% with a Zacks Rank of 2. WSO has been underwhelming in the past four quarters, reporting below-expectation earnings with an average miss of 10%. You can view the complete list of today’s Zacks Rank #1 stocks here.

Watsco, Inc. Price and EPS Surprise

Watsco, Inc. price-eps-surprise | Watsco, Inc. Quote

The Zacks Consensus Estimate for WSO’s fourth-quarter 2024 revenues and earnings per share (EPS) stands at $1.65 billion and $2.13, reflecting growth of 3% and 3.4% year-over-year, respectively. (Read more: Watsco Gears Up to Report Q4 Earnings: Key Points to Consider)

Fluor: This Texas-based EPCM provider has an Earnings ESP of -8.09% with a Zacks Rank of 4 (Sell). FLR has exceeded estimates in two of the last four quarters but missed in the other two, resulting in a negative surprise average of 0.3%.

Fluor Corporation Price and EPS Surprise

Fluor Corporation price-eps-surprise | Fluor Corporation Quote

The Zacks Consensus Estimate for FLR’s fourth-quarter 2024 revenues and EPS is $4.72 billion and 78 cents, indicating growth of 23.6% and 14.7%, respectively, compared to the prior year. (Read more: Fluor Gears Up to Report Q4 Earnings: What to Expect)

Vulcan: This Alabama-based supplier of construction aggregates has an Earnings ESP of 0.00% with a Zacks Rank of 3. VMC has surpassed estimates in two of the last four quarters and missed in the other two, showing an average surprise of 0.7%.

Vulcan Materials Company Price and EPS Surprise

Vulcan Materials Company price-eps-surprise | Vulcan Materials Company Quote

The Zacks Consensus Estimate for VMC’s fourth-quarter 2024 revenues is $1.83 billion, which suggests a 0.4% year-over-year decline, while the EPS estimate of $1.76 indicates a 20.6% growth from the previous year.