US construction activity is still “in the middle innings” of its cycle and investor concerns around the segment are “misplaced”, according to Ted Grace of Susquehanna.
Shares of United Rentals, Vulcan Materials Company, Martin Marietta Materials, and Summit Materials, remain “positive” rated.
In a report published Monday, Susquehanna Financial Group analyst Ted Grace noted that three-plus years into the housing/construction recovery, the segment continues to see “solid” cyclical growth within the $360 billion private, non-residential construction market and the broader $1 trillion U.S. total construction sector.
Grace continued by highlighting several data points to support his view of continued momentum in construction. Specifically, the analyst pointed out the acceleration of non-seasonally adjusted growth over the past few months and the “breadth of improvement” across key sub-verticals (e.g., lodging, power, manufacturing, amusement and recreation).
Grace estimates that 2015 real private non-residential construction will have rebounded by 25 percent off its 2011 trough with total construction up 15 percent over the same period. However, non-residential construction will remain approximately 30 percent below its 2008 peak, even as the U.S. economy has grown approximately 20 percent since then.
“Most importantly, however, based on a variety of metrics, we believe the current cycle has legs beyond the horizon of our bottomsup [sic.] forecast (that extends only to 2016),” Grace wrote. “In a cyclical world where the ‘macro’ most often trumps the ‘micro’, we view this as favorable for Positive-rated United Rentals, Vulcan Materials, Martin Marietta Materials and Summit Materials.”
Grace is forecasting a per capita spending of $1,130, which exceeds both the 10- and 20-year average of $1,200 and $1,300, respectively. Nevertheless, this also falls 33 percent below the 2008 peak per capital consumption of $1,710.
Bottom line, the analyst concluded that his non-residential construction forecasts are suggestive of “nothing more aggressive than mid-cycle” and “well below any semblance of peak.”