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3 Stocks to Watch in Construction

By Reuben Gregg Brewer - Sep 4, 2015 at 2:05PM

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Construction is a huge business spanning multiple different sectors of the economy. Here are three key players in three largely different spaces.

The word construction brings to mind earth-moving equipment and buildings being erected from the ground up. And while true, there's so much more to the industry. That's why you'll want to watch its varied participants if you are interested in the space. Some good names to start with include D.R. Horton (DHI -0.86%), Fluor Corporation (FLR 2.00%), and Granite Construction (GVA 2.84%).

Your home came from somewhere
The place where the construction industry probably touches you most directly is your house. It was built by someone, and often that means a large, publicly traded home builder like D.R. Horton. This construction company builds everything from your basic starter house to luxury accommodations where no expense is spared. It is a big company in the highly fragmented home building space, with operations in 27 states.

A house under construction. Source: Rishichhibber via Wikimedia Commons.

While the projects Horton takes on are often large in scale, since it works on communities and not one-off properties, building any single home isn't a long-term process. So the business can be, and has historically been, highly volatile. For example, during the housing-led 2007 to 2009 recession, Horton's bottom line fell deeply and quickly into the red. That said, earnings can expand pretty fast, too, when things are going well. But you'll want to make sure to keep an eye on the economy and the housing market, here.

Bigger projects
Still, building a house is only one small piece of the construction puzzle. Fluor Corporation, for example, builds things like offshore oil wells in the arctic and gold mines around the world. It can handle everything from engineering and design to construction and project management.

In recent years, the oil and gas industry has been a big part of the company's business. That was great when oil prices were high, but once oil prices started to plummet, it became a notable liability. You'll want to keep an eye on how the company's business breaks down by sector and pay close attention to how it shifts over time.

The construction projects Fluor takes on are often long-term in nature, unlike a house that may take a few months to build. In fact, some of Fluor's projects can take years to complete. So, you'll also want to look at the company's backlog, a number that represents work it has ahead of it. Moreover, because so many of the company's projects are long term, its revenues can actually be smoother than you might expect based on the often volatile nature of the industries it serves.

Hathaway Bridge, another Granite project. Source: Balon Greyjoy via Wikimedia Commons.

Still, if there's a notable downturn in a key sector, it will eventually show up in Fluor's results. In addition, a reliance on big projects can lead to lumpy revenues, though Fluor's size offsets that risk to some degree.

Bridges and roads
To be sure, Fluor builds far more than just oil wells and gold mines, but those have been key projects lately. If you are looking for something a little easier to get your head around, Granite Construction may be more your speed. This company works on similar projects to Fluor, but it focuses more on things like roads, tunnels, and bridges. Stuff you actually use directly.

It breaks its business down into three parts: construction materials (about 10% of the top line), large projects (about a third of the business), and plain old construction (making up the rest of revenues). The last two are the company's bread and butter and are filled with similar projects -- they just differ in scale and the length of time it takes to complete the work.

For an example of the company's work, take a walk through the American Airways terminal in New York's JFK airport, which the company helped build, or a ride on the SunLink Tuscan Modern Streetcar system in Arizona, another project the company worked on. Those are just two of many projects Granite has or is currently working on, and they give a flavor of the breadth of its abilities.

Like Fluor, backlog is an important issue to watch, here. That said, Granite is a fraction of the size of Fluor, and earnings have been more volatile. However, with the American Society of Civil Engineers giving the U.S. infrastructure system a grade of just D+ just a couple of years ago, it's a reasonable bet that Granite will find more project opportunities in the future to support its growth.

The scope is huge
So, construction isn't a simple industry; there's a lot going on, and projects appear in various sizes and in various locations, from down the street to around the world. To get a handle on how big the industry really is, you'll need to watch construction companies that build small like D.R. Horton, that build large like Fluor, and that build in-between like Granite. And you might just find you'll want to add them to your portfolio along the way.

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Stocks Mentioned

D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
$68.16 (-0.86%) $0.59
Fluor Corporation Stock Quote
Fluor Corporation
$26.56 (2.00%) $0.52
Granite Construction Incorporated Stock Quote
Granite Construction Incorporated
$32.60 (2.84%) $0.90

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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