Here's Why Second-Quarter 2017 GDP Data Are Sending Infrastructure Stocks Higher

What happened

Many infrastructure stocks have tried to persuade the market in recent months that the construction cycle was being extended. The latest economic data from the second quarter of 2017 seem to corroborate their argument.

The estimate for GDP growth was revised upward from an original estimate of 2.7% to 3%, which would mark the fastest quarterly growth rate achieved by the American economy since the first quarter of 2015. Additionally, ADP estimates that the economy added 18,000 construction jobs during August, up from just 6,000 jobs added in July. 

Here's how the stocks of major building materials and cement companies responded by noon today:

Data source: Google Finance.

While economic growth is generally good news for these infrastructure stocks, there may be some caveats to that 3% GDP growth estimate investors should consider.

So what

The second-quarter 2017 GDP data and August jobs data released today certainly support the financial results from the last quarter announced by all five companies in late July and early August. Several companies achieved record levels of revenue and earnings, while most reported growth across each reportable business segment. More impressive, the results were achieved despite unusually wet weather that negatively affected the timing of shipments and construction projects.

Ready-mix concrete leader US Concrete grew year-over-year revenue 24% in the second quarter. The company, which has grown both organically and through acquisitions in recent years, hinted that more major commercial projects and regional acquisitions were likely in the second half of the year. 

Image source: Getty Images.

Vulcan Materials, the nation's largest producer of construction aggregates, achieved record unit profitability despite suffering the worst impacts among the group from wet weather. Nonetheless, it reported that the backlog of public highway orders was the highest it had been in three years and that aggregate orders would increase 5% to 10% from August through the end of the year. 

Investors found similar positive developments across the board. Martin Marietta Materials reported record revenue, gross profit, operating income, and EPS. Summit Materials grew year-over-year revenue 16% and grew organically across all business lines. Eagle Materials grew EPS 22% on record revenue.

Despite the current momentum, there were some mixed signals in today's report.

• Much of the 3% GDP growth achieved in the second quarter of 2017 was driven by consumer spending, which comprises about two-thirds of the economy.
• Then again, nonresidential fixed investment -- including things such as the construction of buildings -- saw one of the biggest upward revisions, from 5.2% to 6.9%. It contributed 0.85% of total economic growth during the period.
• However, residential investment slipped 6.5% during the quarter, although that was less than the original estimate calling for a 6.8% decline.

The decline in residential investment shouldn't be a big concern for most of these infrastructure stocks, as they rely more heavily on commercial projects and large-scale public works. But it could hint at a source of weakness in the economy as a whole. 

Now what

Generally speaking, the robust improvement across most parts of the economy could result in high investment rates for another couple of quarters -- great news for building materials companies. You know what they say: a rising tide lifts all boats. Mr. Market is right to be excited about the performance of infrastructure stocks for at least the remainder of 2017. If there was any trace of doubt that the construction cycle was at multi-year highs after the industry released second-quarter 2017 financial results, then today's economic data removed it.