Feature Industry Review

The Best Companies of the Construction Industry – June 2015

Best Companies of the Construction IndustryWhile ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best companies of the construction industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 14 were identified as being closely related to the construction industry.  Of those, none suitable for the Defensive Investor, seven are suitable for the Enterprising Investor, and the remaining seven are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 99.44% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 28.54.  The industry as a whole, therefore would appear to be fairly valued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

D.R. Horton Inc. (DHI)

DR_Horton_LogoD.R. Horton Inc. performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $1.33 in 2011 to an estimated $1.62 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 4.53% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

Lennar Corporation (LEN)

Lennar_corporation_logoLennar Corporation performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $1.95 in 2011 to an estimated gain of $2.63 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 4.64% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged over 30% annually. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

PulteGroup Inc. (PHM)

logo (1)PulteGroup Inc. performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the inconsistent dividend history and the insufficient earnings stability or growth over the last ten years, while the Enterprising Investor is only concerned by the lack of earnings stability over the last five years. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $4.19 in 2010 to a gain of $2.05 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 1.01% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)

Quanta Services Inc. (PWR)

220px-QScolorjpgQuanta Services performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of dividend payments along with the high PEmg ratio, while the Enterprising Investor is only concerned with the lack of dividend payments. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $0.76 in 2010 to $1.37 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 6.15% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

Flowserve Corporation (FLS)

FS_red2x3quartersFlowserve should satisfy the Enterprising Investor but not the Defensive Investor. The Defensive Investor is concerned by the short dividend history and the high PB ratio, while the Enterprising Investor is only concerned by the level of debt relative to the net current assets. Therefore, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.41 in 2011 to an estimated $3.27 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 4.39% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 7.1%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating Flowserve is fairly valued at the present time.  (See the full valuation on Seeking Alpha)

The Full List

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Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
DHI D.R. Horton, Inc. E 4/16/2015 $62.40 $27.86 44.65% 17.20 0.90%
FLR Fluor Corporation (NEW) E 4/23/2015 $39.28 $54.67 139.18% 16.67 1.54%
FLS Flowserve Corp E 5/19/2015 $62.60 $52.64 84.09% 16.10 1.37%
HD Home Depot Inc S 11/10/2014 $126.71 $112.24 88.58% 31.62 2.10%
JEC Jacobs Engineering Group Inc E 3/27/2015 $31.04 $42.50 136.92% 14.91 N/A
LEN Lennar Corporation E 5/12/2015 $101.13 $51.44 50.87% 19.56 0.31%
LOW Lowe’s Companies, Inc. S 12/3/2014 $42.50 $69.66 163.91% 33.65 1.61%
MAS Masco Corporation S 4/11/2014 $0.00 $27.41 N/A N/A 1.31%
MHK Mohawk Industries, Inc. S 1/20/2014 $137.24 $191.90 139.83% 53.90 N/A
PHM PulteGroup, Inc. E 3/25/2015 $79.05 $20.42 25.83% 9.96 1.57%
PPG PPG Industries, Inc. S 3/11/2015 $515.34 $117.74 22.85% 8.79 1.22%
PWR Quanta Services Inc E 4/2/2015 $44.53 $29.19 65.55% 21.31 N/A
SHW Sherwin-Williams Co S 5/15/2015 $327.58 $282.60 86.27% 33.21 0.95%
VMC Vulcan Materials Company S 5/20/2015 $35.45 $86.58 244.23% 94.11 0.46%

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To view the MG Value and PEmg information,  you must be logged in as a premium member.  Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
DHI D.R. Horton, Inc. E 4/16/2015 $27.86 0.90%
FLR Fluor Corporation (NEW) E 4/23/2015 $54.67 1.54%
FLS Flowserve Corp E 5/19/2015 $52.64 1.37%
HD Home Depot Inc S 11/10/2014 $112.24 2.10%
JEC Jacobs Engineering Group Inc E 3/27/2015 $42.50 N/A
LEN Lennar Corporation E 5/12/2015 $51.44 0.31%
LOW Lowe’s Companies, Inc. S 12/3/2014 $69.66 1.61%
MAS Masco Corporation S 4/11/2014 $27.41 1.31%
MHK Mohawk Industries, Inc. S 1/20/2014 $191.90 N/A
PHM PulteGroup, Inc. E 3/25/2015 $20.42 1.57%
PPG PPG Industries, Inc. S 3/11/2015 $117.74 1.22%
PWR Quanta Services Inc E 4/2/2015 $29.19 N/A
SHW Sherwin-Williams Co S 5/15/2015 $282.60 0.95%
VMC Vulcan Materials Company S 5/20/2015 $86.58 0.46%

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Disclaimer:
 The author held a long position in Home Depot (HD) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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