Construction Feature Industry Review

The Best Companies of the Construction Industry – October 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 560 companies reviewed by ModernGraham, 17 were identified as being closely related to the construction industry.  Of those, two are suitable for the Defensive Investor, six are suitable for the Enterprising Investor, and the remaining nine are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 89.86% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 23.3.  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)

D.R. Horton is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last 10 years, while the Enterprising Investor has no initial concerns. As a result, all 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 that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from a loss of $1.33 in 2011 to an estimated gain of $1.65 for 2015. This is a fairly strong level of demonstrated growth and outpaces the market’s implied estimate for annual earnings growth of only 4.08% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged considerably more than the market’s estimate annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that D.R.Horton is significantly undervalued at the present time, a result which is in line with some of its peers. (See the full valuation)

Lennar Corporation (LEN)

Lennar Corporation qualifies for the Enterprising Investor but is not suitable for the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $1.95 in 2011 to an estimated gain of $2.62 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.63% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price. (See the full valuation)

PulteGroup, Inc. (PHM)

PulteGroup Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, along with the inconsistent dividend history.  The Enterprising Investor is only initially concerned by the lack of earnings stability over the last five years.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $3.12 in 2011 to an estimated gain of $2.14 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.23% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Quanta Services Inc (PWR)

Quanta Services passes the initial requirements of both the Defensive Investor and the Enterprising Investor. Both investor types are only initially concerned by the lack of dividends. As a result, all value 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 that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $0.74 in 2011 to an estimated $1.57 for 2015. This is a fairly strong level of demonstrated growth and outpaces the market’s implied estimate for annual earnings growth of only 4.64% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 22.7% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that Quanta Services is significantly undervalued at the present time. (See the full valuation)

The Good

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

Fluor Corporation (NEW) (FLR)

Fluor Corporation qualifies for the Enterprising Investor and the more conservative Defensive Investor.  The Defensive Investor is only concerned with the low current ratio.  The Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.13 in 2011 to an estimated $3.62 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 2.5% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)

Flowserve Corp (FLS)

Flowserve Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the inconsistent dividend history, and the high PB ratio.  The Enterprising Investor is only initially concerned with the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.41 in 2011 to an estimated $3.03 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 3.52% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)

The Full List

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Clicking on the company name will take you to the company’s latest valuation.  For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
ACM Aecom S 8/4/2015 $2.67 $29.39 1100.75% 19.59 N/A
ALEX Alexander & Baldwin Inc S 8/12/2015 $5.03 $35.37 703.18% 39.30 0.57%
DHI D.R. Horton, Inc. E 7/16/2015 $63.42 $30.00 47.30% 18.18 0.83%
FLR Fluor Corporation (NEW) D 7/23/2015 $47.59 $45.55 95.71% 12.58 1.84%
FLS Flowserve Corp E 8/19/2015 $48.97 $44.59 91.06% 14.72 1.61%
HD Home Depot Inc S 11/10/2014 $126.71 $118.67 93.65% 33.43 1.99%
JEC Jacobs Engineering Group Inc E 7/16/2015 $27.52 $39.76 144.48% 14.35 N/A
LEN Lennar Corporation E 8/12/2015 $100.74 $49.08 48.72% 18.73 0.33%
LOW Lowe’s Companies, Inc. S 12/3/2014 $42.50 $71.19 167.51% 34.39 1.57%
MAS Masco Corp S 9/2/2015 $36.96 $26.53 71.78% 27.64 1.43%
MHK Mohawk Industries, Inc. S 10/5/2015 $241.78 $190.87 78.94% 30.39 N/A
MLM Martin Marietta Materials, Inc. E 7/22/2015 $56.52 $159.34 281.92% 49.18 1.00%
PHM PulteGroup, Inc. E 10/2/2015 $82.21 $19.62 23.87% 9.17 1.63%
PPG PPG Industries, Inc. S 3/11/2015 $515.34 $93.40 18.12% 6.98 1.54%
PWR Quanta Services Inc D 7/23/2015 $60.47 $25.63 42.38% 16.32 N/A
SHW Sherwin-Williams Co S 5/15/2015 $327.58 $236.68 72.25% 27.81 1.13%
VMC Vulcan Materials Company S 5/20/2015 $35.45 $92.96 262.23% 101.04 0.43%

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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.

For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
ACM Aecom S 8/4/2015 $29.39 N/A
ALEX Alexander & Baldwin Inc S 8/12/2015 $35.37 0.57%
DHI D.R. Horton, Inc. E 7/16/2015 $30.00 0.83%
FLR Fluor Corporation (NEW) D 7/23/2015 $45.55 1.84%
FLS Flowserve Corp E 8/19/2015 $44.59 1.61%
HD Home Depot Inc S 11/10/2014 $118.67 1.99%
JEC Jacobs Engineering Group Inc E 7/16/2015 $39.76 N/A
LEN Lennar Corporation E 8/12/2015 $49.08 0.33%
LOW Lowe’s Companies, Inc. S 12/3/2014 $71.19 1.57%
MAS Masco Corp S 9/2/2015 $26.53 1.43%
MHK Mohawk Industries, Inc. S 10/5/2015 $190.87 N/A
MLM Martin Marietta Materials, Inc. E 7/22/2015 $159.34 1.00%
PHM PulteGroup, Inc. E 10/2/2015 $19.62 1.63%
PPG PPG Industries, Inc. S 3/11/2015 $93.40 1.54%
PWR Quanta Services Inc D 7/23/2015 $25.63 N/A
SHW Sherwin-Williams Co S 5/15/2015 $236.68 1.13%
VMC Vulcan Materials Company S 5/20/2015 $92.96 0.43%

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Disclaimer: 

The author held a long position in Home Depot but did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here.  This article is not investment advice and all readers are encouraged to speak to a registered investment adviser prior to making any investing decisions.  Please also read our full disclaimer.

 

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