NEW YORK (TheStreet)-- One of the industrial themes that I have been focused on has been the recovery potential in the US non-residential construction market. Non-residential construction activity typically follows residential construction, which has seen steady improvement over the last 2 years due to an improving economy, low interest rates, improving pent-up demand, and better affordability.
The Architectural Billings Index has shown improvement in both segments of construction, and has posted a 50 or higher reading in 15 out of the last 18 months. This week, both Fastenal (FAST) and WW Grainger (GWW) posted double digit monthly sales and talked about an acceleration in demand. These are the quintessential reads on broad-based industrial and construction activity for the small and medium markets.
One way to play the non residential recovery is through the HVAC players - Heating, Ventilation, and Air Condition manufacturers. I analyze the HVAC players regularly and we own a few in Jim Cramer's Action Alerts Plus (AAP)- namely Johnson Controls (JCI) and Honeywell (HON). Just today, on HON's 1Q conference call management indicated they saw an uptick in non residential construction, with HVAC orders and backlog up mid-single digits year-over-year and services orders stronger. This comes on the heels of JCI announcing the $1.6 billion acquisition of ADT - one of the largest North American HVAC companies. JCI has been vocal that it wanted to increase its HVAC exposure and diversify away from being an auto parts company (it still gets 51% of its revenues in auto) under its new CEO and they are clearly making a bet on the recovery in non resi in particular since ADT gets 65% of its revenues from this segment.