Sterne Agee is out with its top picks in engineering and construction, which is the key infrastructure sector for the rest of us. The firm’s Mike Dudas and Patrick Uotila are expecting a favorable 2014 for the sector.
Growth drivers are said to be multiple cyclical project investment opportunities in North America. Another driver is the expected accelerated backlog additions coming in 2014 and 2015. The team believes that Chicago Bridge & Iron Company N.V. (NYSE: CBI), Fluor Corp. (NYSE: FLR) and Jacobs Engineering Group Inc. (NYSE: JEC) will all greatly benefit from shale monetization. URS Corp. (NYSE: URS) was highlighted as a beneficiary of enhanced private sector focus, and capital allocation changes should allow for upside. Sterne Agee has Buy ratings on all four companies.
Some key outlooks include the following trends and issues for 2014:
- The engineering and construction group outperformed during 2013, a trend that the firm expects to continue through 2014 supported by strong momentum.
- Shale development in North America should continue to support robust upstream plans in liquefied natural gas, chemicals, gas-to-liquids and multiple industrial derivatives supported by global economic improvement.
- Following a soft 2012 and better 2013, Sterne Agee believes the U.S. and global industrial spending cycle should show good growth and allow order support for engineering and construction firms as general manufacturers gear-up capital spending.
- North American proposals for liquid natural gas (LNG) and petrochemical development now exceed $240 billion, compared to roughly $130 billion the firm identified at this time last year.
The firm suggests investors focus on equities supported by solid management teams, exposure to North American energy development, measured risk mitigation and cash generation.
Chicago Bridge & Iron Company N.V. (NYSE: CBI) is picked based on sustainable long-term EPS growth and a unique business model. Sterne Agee said that CB&I appears diversified and well positioned to benefit from multiple energy growth opportunities over the next decade. Its price target is $100 for the stock, above the consensus price target of $87.50 and the $81.75 current price. Be advised that the $100 price target is the street high.
Fluor Corp. (NYSE: FLR) is supported by strong cyclical oil and gas and energy backlog momentum. The firm noted that Fluor has historically earned a premium multiple as the leading global contractor. Its target price of $85 for the stock compares to a current price of $79.42 and an $84.67 consensus price target. The street’s highest price target is not from Sterne Agee, but it is up at $97.00.
Jacobs Engineering Group Inc. (NYSE: JEC) is picked based on its chemical leverage and broad-based recovery among its diverse end markets. Sterne Agee said that Jacobs remains a high-quality equity that reflects a long-term defendable business model with a solid management team and a conservative and strong financial profile. Its acquisition of SKM is also expected to be accretive in 2014 and also should bring more international growth. Sterne Agee’s $70 price target compares to a street consensus of $67.44 and a street high of $78.00. The current share price is about $65.15.
URS Corp. (NYSE: URS) was chosen for its expansion of private sector revenues and enhanced capital allocation strategies. The firm said that URS is continuing to transition from muted public sector markets to private sector attractive growth opportunities including oil & gas markets. Sterne Agee’s $60 price target compares to a consensus of $53.85 and a current share price of $51.95. Sterne Agee does represent the street high here as well.
Infrastructure firms have had to rely mostly on international growth opportunities in the past decade. With the U.S. energy infrastructure buildup and with hopes that the United States may finally invest in its ailing infrastructure, now the companies have huge opportunities inside the country as well.
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