It has been a tough first quarter for some publicly owned construction firms as healthy competition and sluggish project momentum took a toll on early 2013 results, particularly earnings. While some companies had good news to report last month and others predicted a late-year upswing, many analysts were skeptical about the rest of 2013.
Andrew Wittmann, E&C sector analyst for Robert W. Baird, found Q1 reports of 15 tracked public firms "uninspiring," with "little confidence in forward estimates." Even with some firms' backlogs up, "awards [are] falling light and larger prospects seemingly sliding to the right," he said. Offsetting some gains in infrastructure, "power showed incremental erosion, and federal markets bore the first round of sequestration budget cuts," said Wittmann. "Labor underutilization also impacted [firms'] margins."
Wittmann says Baird's proprietary index of tracked companies' backlogs fell 1.5% year-over-year, its largest recent decline (see chart). "The degree of back-end acceleration is a notable risk," he says. "Sector bulls are correct to look beyond 2013 ... as history shows substantial risk of [project] delays."
Despite revenue and backlog gains, Granite Construction Inc. reported a $22-million first-quarter loss, missing the Zacks' consensus estimate "by a wide margin," the research firm said. This pushed analysts to lower earnings estimates for 2013 and 2014, said Zacks.
"Granite's short-term results and outlook have been affected by the competitive environment in certain markets ... particularly in California," Granite CEO James Robert said on May 9. Roberts expects a pickup in private-sector work and profit recognition on large projects to boost margins in 2014.
Credit Suisse analyst Jamie Cook pointed to project-execution issues for earnings misses by contractors Willbros Group and McDermott International. Willbros stock fell 20%, with $14.6 million in oil-and-gas sector losses. McDermott reported cost overruns on seven of 11 projects. Also, Cook said the stock of WorleyParsons fell 12% after the firm lowered its 2013 outlook, based on slumping Australian mining and project delays in Canada's oil sands. The April announcement by oil firms to delay on-shore building of the $45-billion Browse LNG project in Australia was symptomatic of economic forces affecting large projects. Even so, CB&I's stock rose with investor Warren Buffett's buy of 6.5-million shares as an entree to the North American energy market, analysts say.