David Silver: If the time to consider investing in cyclicals is near the beginning of an economic upturn, aggressive investors might consider the capital spending-driven engineering and construction industry. E&Cs design, build, and maintain mining and manufacturing facilities, transportation networks; buildings and infrastructure; and power generation facilities.
A cyclical bottom may be at hand: Pressures from years of low energy and commodity prices have abated, and industry restructuring has been broad-based and productive. Stabilizing markets and a pro-business administration in Washington have led to guarded optimism from managements and customers. We expect order backlogs to stabilize and then grow during 2017, and for revenue growth to begin in 2018.
Policies of the new U.S. president are another potential catalyst, even without a federal infrastructure spending boom. Potential benefits from lower corporate tax rates, reduced regulatory burdens, and repatriation incentives mean lower building costs, speedier completions, and higher returns on investments.
Fluor represents the best long-term value in the group, in our view. Its stock price undervalues diverse end market strengths, a deep array of in-house support services to ensure project completions, and a big-project mentality honed over decades.
Chicago Bridge & Iron appears attractive on valuation metrics as well, although it seems more appropriate for investors with a greater appetite for risk. Apart from its narrow energy end-market focus and structurally high share of riskier fixed-price contracts is the lingering uncertainty regarding the sale of its nuclear construction unit to Westinghouse.
