Construction stocks tank as Trump’s infrastructure plans fizzle

Trump is now talking about trying to get one through Congress by year-end, with concern it may be pushed into 2018

DALLAS • The predicted boom in construction stocks under President Donald Trump is turning into a bust.

Trump promised to deliver a US$1 trillion (RM4.27 trillion) infrastructure early in his first year but is now talking about trying to get one through Congress by year-end, with concern it may be pushed into 2018. Waning optimism is taking a toll on builders such as Fluor Corp and Chicago Bridge & Iron Co (CBI), which already have been hit by cost overruns on major projects.

“Clearly we had a pop in all these names with the election,” said Brent Thielman, a construction industry analyst with DA Davidson & Co. “As investors are digesting that this is going to take more time — if it happens at all — we’re sort of back to the reality of the market.”

Trump abandoned a plan for an infrastructure advisory group this month in the wake of his controversial comments on the violence in Charlottesville, Virginia. While top  advisor Gary Cohn said the administration still hopes to get an infrastructure plan approved this year, Congress must first tackle the debt  ceiling and an as-yet-unwritten tax bill before turning its attention to America’s crumbling roads and bridges.

“Delivering US infrastructure projects will be challenging,” said Sonia Baldeira, an analyst at Bloomberg Intelligence, after Trump scrapped plans for the council.

During the energy boom in 2014, Fluor, the largest publicly traded construction company by revenue, and CBI signed fixed-priced contracts to build electricity, petrochemical and natural gas processing plants. Now, they’re finding that payments aren’t covering expenses inflated by snags on equipment, worker productivity and poor original estimates. Fixed-price contracts have higher profit potential for the builder but carry more risk than cost-reimbursable projects.

“You have highly visible fixed-price contract charges taken by many companies, primarily CBI and Fluor,” said Mike Dudas, an analyst with Vertical Research Partners. “That certainly has given a negative connotation to the group in general.”

Non-residential construction spending increased 0.6% in the first six months of this year compared to a year ago, held back by a 5.4% drop in public spending, according to Commerce Department data. Total spending for manufacturing facilities, power plants, highways, water and waste-water  projects have dropped this year. A few bright spots are gains of more than 10% for office and commercial construction.

Energy construction boomed in 2013 and 2014 as oil prices rose above US$100 a barrel, which increased capital spending to drill. Also, drilling techniques that unlocked vast naturalgas deposits in shale fields made the fuel abundant and cheap, spurring investment in petrochemical plants along the US Gulf Coast.

Irving, Texas-based Fluor — which gets about half its revenue from its energy, chemicals and mining unit — took a US$124 million writedown in August following charges of US$30 million in the first-quarter (1Q) and US$265 million last year related to struggles with gas-fired power plants and a petrochemical facility.

CBI, which is based in the Netherlands but run from a Houston suburb, plans to sell its technology unit to  plug a financial hole after a US$548 million write-down in 2Q. The charges stem from problems on two liquid  natural gas processors and two gas-fired power plants.

Even construction stocks with less work tied to the oil and gas industry have declined this year. Jacobs Engineering Group is down 11% in 2017, while AECOM, the second-largest publicly traded construction company, has fallen 14%.

For some investors, there may be buying opportunities: Fluor and CBI are cheap. The stocks this month have dropped to levels not seen in the past decade except for only a few months at the end of 2008 and beginning of 2009, in the throes of the recession. Still, the companies will have to prove they’ve stemmed the writedowns on projects to regain Wall Street’s confidence.

With natural gas from US shale fields still abundant and cheap, there will be another round of projects for power, petrochemical and liquefied natural gas, said Andrew Wittmann, an analyst with Robert W Baird & Co. It could take a year or longer for that to happen, he said. — Bloomberg