Engineering & Construction

Generally, Engineering, Infrastructure and Professional Services equities have businesses that should support a more visible, less cyclical revenue flow during an economic slowdown. However, valuations have suffered from the coronavirus driven economic dislocation and the destruction witnessed among global energy markets. Shares whose companies touch any level of energy customer exposure have underperformed the S&P 500 since mid-February; we believe the market has overreacted to KBR low risk, opex-oriented exposure. Companies with near zero exposure (J, ACM) have executed business model transformations that can better withstand global cyclical economic headwinds. Interest rate tailwinds and likely fiscal stimulus can support aggregates/US Construction related companies (GVA, MLM, VMC) while regulatory-driven electric, natural gas utility investment can aid PWR. We believe investors should focus upon three dynamics to better understand and monitor these US professional service/construction names during the next couple of months – (1) Fiscal stimulus, (2) Capital allocation by managements supported by quite healthy financial profiles, (3) Energy opex/maintenance flows. Overall, we believe KBR’s pullback creates an attractive time to revisit. Jacobs’ favorable end market mix – government solutions and infrastructure – and overcapitalized balance sheet should find favor with investors. Vulcan Materials and Martin Marietta operate within quite healthy, structural markets, although expected pushout of US energy investment could weigh on non-residential at the margin.