The 3 Best Construction Stocks To Own Forever

Construction Stock #1:  Fluor Corporation (FLR)

Fluor Corporation produces about $19 billion in annual revenue and after a recent, large selloff, the stock has a market capitalization of just under $5 billion.

Fluor’s attractiveness begins with its very diverse base of clients. Fluor serves just about every major industry that needs construction engineering services and thus, during downturns, it is perhaps more insulated than other, more specialized firms. Indeed, during the Great Recession, Fluor’s revenue dipped only slightly in 2009 and 2010 before rebounding strongly in 2011 in excess of pre-Recession highs. Earnings actually rose during 2009 before taking a hit in 2010, but just like revenue, earnings rebounded much higher in 2011.

The company’s dividend wasn’t raised during the Great Recession but it was maintained when so many others weren’t, which is another sign of the strength of the company’s model.

We see very attractive long-term prospective returns from Fluor as the stock has sold off meaningfully of late. Shares are at a 10-year low as of now, levels they haven’t seen since the depths of the Great Recession. Concerns over the company’s customers delaying investment projects that would see significant revenue for Fluor have hit the stock.

However, for long-term investors, even if projects are delayed, they must be completed eventually as they are critical infrastructure upgrades. Thus, we see near-term volatility as opportunity for new investors.

Fluor Awards & Backlog

Source: Q3 earnings slides, page 5

Indeed, this slide from the Q3 earnings presentation shows that Fluor’s book-to-bill ratio was in excess of 2 in Q3, indicating it took twice as many orders as it filled. Anything above 1 is an indicator of strong demand so a value of 2.07 shows that longer-term, demand for Fluor’s services is intact. Indeed, its backlog is up to $34.9 billion as of the end of the quarter, nearly two years’ worth of revenue.

We see robust earnings growth for Fluor moving forward as it should achieve about 10% earnings growth annually, per management guidance. The stock is yielding 2.3% after the selloff and we also see a sizable tailwind in the high single digits from a rising valuation. Fluor trades for ~11 times next year’s earnings estimate today, which compares very favorably to its long-term average around 15 times earnings. Thus, we see Fluor as a strong pick for long-term investors who don’t mind the short-term volatility in the stock.

Construction Stock #2: Caterpillar (CAT)

Next up is Caterpillar Inc. (CAT), a manufacturer of heavy equipment that is used in construction activities including diesel engines, industrial gas turbines, as well as ready-to-use machines for mining and construction activities. It competes in diverse industries including construction, mining, energy, and transportation. The company produces about $55 billion in annual revenue and after a recent weak period in the stock, its market capitalization is $74 billion.

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