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The U.S. construction and engineering industry, languishing on life support since the recession razed company profits, may be the prime beneficiary of a strengthening economy.
Goldman Sachs raised its outlook on the sector to "neutral" three weeks ago. And there is growing optimism about government stimulus projects and a pending housing rebound, but most stocks still remain depressed. Here are two small-cap engineering companies that offer compelling stories, fundamentals and value.
Moon Township, Pa.-based Michael Baker Corp. (BKR) provides engineering and energy services to public- and private-sector clients. Its principal business units are poised to ascend as stimulus projects ramp up and crude oil climbs toward $70 a barrel. Despite a market value of only $387 million, the company has executed lofty projects since its inception, including the design of the Trans-Alaska Pipeline and the KHMR-American Friendship Highway in Cambodia. It's consistently ranked among the top 20 U.S. design firms in each of its markets. TheStreet.com Ratings upgraded Michael Baker to "buy" on May 29. The company's first-quarter revenue declined a marginal 1% to $170 million, but earnings per share surged 35%. Michael Baker has more than doubled its cash position to $57 million since the prior year's first quarter and boasts zero debt obligations. Shares of Michael Baker are cheap on the basis of earnings in the construction and engineering industry. With a price-to-earnings ratio of about 13, the stock is 23% cheaper than its average peer. It has risen 9% this year. Northwest Pipe Co. (NWPX - Get Report), based in Vancouver, Wash., is a similar, but more focused, infrastructure play. The company manufactures welded steel pipes for water transmission and fabricated metal products to store propane and other gases. The pipe business offers large-scale customizable designs, which is appealing for public and private projects that require flexibility. The company has found a way to line the inside of steel sewage pipes with corrosive-free material, lowering costs and boosting flow efficiency. TheStreet.com Ratings raised Northwest Pipe to "buy" on May 28.