3 Reasons and 3 Stocks to Bet On Construction in 2022
A hawkish Fed may not be encouraging for the construction sector, but there are other tailwinds that can help us pick winners.
A hawkish Fed is bad news for the Construction sector, as higher interest rates will increase borrowing costs for both the construction companies and those looking to buy homes. And although the Fed has indicated that it will keep the stock market impact in mind, it is under a lot of pressure to bring down inflation.
So interest rate hikes are likely to follow soon after bond purchases normalize. The tapering started in November, when the Fed was buying $120 billion worth, but overall purchases will still continue to increase until some time in March, according to some estimates. And we should expect rate hikes some time after that, certainly by the end of the year. But that still means that we have a full year during which a lot of things are set to change for the Construction sector.
The first point to keep in mind is that inventories are still low and housing prices continue to rise. And inventories are unlikely to grow rapidly, given the fact that there are a lot of constraints.
The first constraint is with respect to labor, where supply is very tight. The second constraint is with respect to supply chain issues, which is limiting raw material availability and pricing. The third is with respect to availability of lots, which is a longer-term issue that affects different players differently (depending on the way each has dealt with the situation), and won’t be solved any time soon.
The second reason why I think there will still be opportunities here is the fact that there is secular demand for housing related to demographics. Because 2021 was so tight, a lot of this demand was shelved. On the other hand, those forced into the "new normal" of operating from home created incremental demand, not all of which was satisfied by the tight conditions last year.
So the demand situation remains conducive. If there’s a rate hike toward the end of the year, that’s even more reason to buy before that, to lock in a lower rate.
And finally, the Construction sector doesn’t just include homebuilders but also non-residential and other kinds of construction and the companies that supply to them. And this segment is going to benefit from Biden’s $550 billion allotment over the next five years for a number of things including roads and bridges, rail repair, public transit, airports, ports, pipelines, EV infrastructure and other public infrastructure.
Winnebago Industries WGO
Headquartered in Iowa, Winnebago Industries is a leading producer of recreational vehicles. The motorhomes, or RVs, are made in the company's vertically integrated manufacturing facilities in Iowa, while the travel trailer and fifth-wheel trailers are produced in Indiana. Winnebago distributes its RV and marine products through independent dealers throughout the U.S. and Canada.
The demand for recreational vehicles picked up during the pandemic, and is showing no signs of letting up. It was initially driven by the need to travel while also maintaining social distancing. But as the pandemic ebbed and flowed, it was apparent that a new normal was in order. Since the millennial and younger population is already looking for an active outdoor lifestyle, RVs that are increasingly better connected and built on sustainable considerations have been the way to go.
Fleet owners have also been increasing capacity as there’s also increasing demand in the rental market. Management quoted RBIA survey data on the last earnings call showing that an additional 9.6 million households say they are considering buying an RV in the next five years, and that over 14 million households have camped for the first time during 2020 and 2021.
Winnebago beat November quarter earnings expectations by 53.3%. Its 2022 and 2023 (ending August) earnings estimates are up a respective $2.74 (28.7%) and $1.05 (11.2%) in the last 60 days. Analysts currently expect Winnebago revenue and earnings to increase 25.7% and 43.7% in 2022.
The dealer order business model ensures that there’s no excess inventory and the backlog indicates that the company is racing to replenish dealer inventories. As such, estimates are on track to keep moving upward.
Winnebago carries a Zacks Rank #1 (Strong Buy) stock and Value Score of A, and belongs in the top 13% of Zacks-classified industries, indicating strong upside potential.
Beazer Homes USA BZH
Beazer Homes USA designs, builds and sells single-family homes, primarily for the entry-level and first move-up segment. So their homes tend to balance quality and value. The company's subsidiary, Beazer Mortgage, originates mortgages for its home buyers.
Beazer Homes is one of the lucky homebuilders that has substantially increased its lot position in recent times. At the end of fiscal 2021 (ending September), active lots were up 25% from the prior year. It also grew its share of lots controlled by option from about 35% to nearly 50%.
This ensures a steady capacity to grow. While supply chain disruptions and cost increases are impacting Beazer Homes just as they are other players, the strong demand environment facilitates record growth.
As a result, Beazer Homes topped the Zacks Consensus Estimate by 91.5% in the last quarter. Additionally, the estimated earnings for 2022 increased $1.53 (44.0%) in the last 60 days. The estimated earnings for 2023 increased $1.34 (33.6%) during the same period.
Shares of this Zacks Rank #1 company carry a Value Score of A and Growth Score of B. Besides, Beazer Homes belongs in the top 36% of Zacks-classified industries, another indication of upside potential.
Toll Brothers TOL
Toll Brothers Inc. builds single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves.
Toll Brothers offers a broader product range than Beazer and it also sells land. So, while it is also benefiting from the strong demand that has so far allowed it to transfer rising cost to the customer, it also benefits from strategic initiatives related to its land business. Management has said that its land acquisition has become more capital efficient now, which along with improving operating efficiencies, is contributing to its profitability.
Toll Brothers beat the Zacks Consensus Estimate by 21.8% in the last quarter. In the last 60 days, The Zacks Consensus Estimate for its fiscal 2022 (ending October) earnings has increased 89 cents (10.1%) while the 2023 estimate has increased $1.13 (11.2%). Analysts currently expect Toll Brothers’ revenue and earnings to grow a respective 17.8% and 46.3% this year followed by 8.5% and 15.9% growth in the next.
Toll Brothers shares carry a Zacks Rank #1 and an A for both Value and Growth. They’re in the same industry as Beazer, so they too have good upside potential.
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