It's been nearly two months since Tutor Perini (NYSE:TPC) announced new guidance for fiscal 2016 -- guidance that suggests the construction firm will miss Wall Street estimates when it next reports earnings. And yet, over the past 10 days, we've already seen two investment bankers raise their price targets on Tutor Perini stock.
Ten days ago, analysts at top Swiss megabanker UBS announced a price target hike for Tutor Perini, from $26 a share to $32. And now this morning, StreetInsider.com is telling us nearly as-well-rated MKM Partners has followed suit, hiking its price target from $31 to $34.
So what's up with that?
Both bankers already like the stock, and rate Tutor Perini a buy. Here are three things you need to know about why they love it.
1. Top marks from UBS
Let's start with UBS' note, which came out a little over a week ago, and bumped Tutor Perini's price target up $6 to $32. With Tutor shares currently fetching just $28 and change on the market, that works out to a potential 12.7% profit on the stock. But how will Tutor Perini get there?
As explained in a write-up on TheFly.com, UBS says Tutor Perini is growing backlog at the same time as it is enjoying "solid pricing" on its long-duration projects. This suggests the company will be able to continue growing its revenue for years, and more importantly, growing it profitably.
According to data from S&P Global Market Intelligence, most analysts who follow Tutor Perini are forecasting about a 10% growth rate for the stock's profits. UBS' analysis would appear to support this view.
2. MKM gives Tutor an A as well
Ten percent growth appears to be the mark MKM would assign to Tutor Perini as well. After sharpening its pencil, MKM is guesstimating that Tutor Perini will earn about $2.44 per share in 2017, and then grow those profits to $2.68 in 2018 -- 10% growth.
Now, the bad news is that MKM used to think Tutor Perini would earn $2.58 per share in 2017. This seems to be no longer the case. Still, at least most of the money that MKM subtracted from its 2017 estimates is reappearing in 2018, and that should help to ensure that Tutor at least matches Wall Street's expectation of a steady growth rate. Not a "fast" growth rate, mind you, but at least steady.
3. Bargains are hard to find
When you get right down to it, MKM laments that "investment options in infrastructure remain a hot topic among investors, particularly after the election results." That sounds like it should be good news, but actually means that it's getting harder to find true bargains in this industry -- because investors keep bidding up the stock prices to the point where truly cheap construction stocks are hard to find. In Tutor's case, for example, the stock has already risen 60% over the past year, and at 11.6 times earnings, the stock is no longer an obvious bargain at its 10% growth rate.
That said, after searching carefully for buyable stocks, MKM has come to the conclusion that "there are only a handful of [engineering and construction] companies to invest in to get exposure to that end market" -- and Tutor Perini at its low-double-digit P/E is one of them. Says the analyst, with the single possible exception of Granite Construction (NYSE:GVA), "TPC is the company in our coverage universe with the most exposure to infrastructure spending," and so the best candidate for a buy rating.
The most important thing: Picking the better bargain
If getting a solid endorsement of Tutor Perini out of MKM seems like pulling teeth, there may be a reason for that. Paying 11.6 times earnings for 10% growth -- with no dividend! -- does feel like a bit of a stretch for value investors.
But compared to the analyst's other favorite, Granite Construction, Tutor Perini at least looks like a relative bargain. Granite is growing faster, with analysts projecting an 18.5% long-term growth rate, but at 32.3 times earnings, the stock costs a whole lot more than Perini. Indeed, Granite sports a PEG ratio of 1.75, about a 50% premium to Tutor Perini's 1.16.
Long story short, I can't really recommend Tutor Perini stock myself, not at today's price. But if you feel you absolutely must own a construction stock to profit from the expected boom in infrastructure spending under President-elect Donald Trump then, well, at least Tutor Perini isn't too awfully overpriced.
In today's stock market, that may be the best you can ask for.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 346 out of more than 75,000 rated members.
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