Barron's has named seven publicly traded construction-related companies to watch in the coming months in the wake of analyst downgrades of construction equipment manufacturers Caterpillar Inc. (ticker: CAT) and Deere & Co (DE).
Wells Fargo downgraded both companies from "Buy" to "Hold" this week with a slight decrease in target price for Caterpillar, after expressing concern that demand for construction equipment might have peaked. Also worth tracking, Barron's said, are Dana Inc. (DAN), which makes drivetrain components for construction equipment; Volvo (VLVLY), which has a construction equipment division; crane manufacturer Terex (TEX); truck company Oshkosh (OSK); and parts supplier Allison Transmission (ALSN).
The U.S. construction industry represents more than $1 trillion of spending. According to the last Commerce Department report, total construction spending increased just 0.1% month over month but decreased 2.7% from the same period a year ago. Nonresidential spending was down 0.3% from June to July but increased slightly year over year.
Despite uncertainty in the construction equipment sector, likely driven in part by the trade war with China and questions about the ultimate cost of tariffs, those engaged in the business of predicting how various economic developments will affect contractors aren't beating the recession drum quite yet.
In fact, Anirban Basu, chief economist for the Associated Builders and Contractors, said that despite the constraint on spending growth, the industry continues to add employees and enjoys robust project backlogs. The shortage of labor, he said, could be one of the factors that has led to decreased spending as some construction companies are not able to start jobs at a pace that meets current demand.
One interesting turn, according to Basu, is the fact that overall U.S. construction input prices, as reported by the U.S. Bureau of Labor Statistics, fell by 0.6% from July to August and 0.9% year over year. The biggest drops from August 2018 to August 2019, according to an analysis by Basu, were for natural gas (-33.3%); unprocessed energy materials (-19.1%); crude petroleum (-15.7%); softwood lumber (-11.7%); iron and steel (-10.7%); and steel mill products (-10.6%).
This, he said, could be signs of a global weakening, lack of growth in construction spending and a strong U.S. dollar. What it means for contractors is unclear because, again, most are reporting plenty of work in the pipeline for the next year to 18 months.
In its latest Contractor Confidence Index (CCI) report, the ABC found that nonresidential contractors expected a slight dip in sales in the next six months but also anticipated expanding their workforces and being able to achieve higher profit margins. This level of confidence, Basu said, was a signal that the nonresidential sector will be a growth driver in the foreseeable future.