This Construct-Related Equity Exhibits Almost Triple-Digit Growth in 2022. Is Continuous Expansion Likely in 2025?
In 2024, numerous stock market victors have emerged. While tech stocks have garnered substantial investor interest, other sectors have also shown impressive performances. One such often-neglected sector is construction, which benefits from robust demand, government spending on infrastructure, and anticipations of Federal Reserve rate reductions decreasing borrowing costs.
Case in point, the Invesco Construction ETF has marked a year-to-date increase of 22%, but through November 25, it surged by 40%. This growth happened before President-elect Trump revealed plans to impose 25% tariffs on both Canada and Mexico, and a 10% levy on Chinese imports.
Despite this hindrance, several construction stocks have still managed to deliver noteworthy returns in 2024. For instance, Tutor Perini (TPC -2.78%) surged by 171% year-to-date. The chart below illustrates its stellar performance.
This diversified construction company, known for its involvement in public works such as bridges and jails, as well as private real estate projects, has experienced a significant boost in demand in 2024. The company's backlog swelled sequentially by 35% to $14 billion in the third quarter, breaking its previous record of $11.6 billion set in 2019. This growth indicates that the business is recovering from a previous lull.
The Fuel Behind Tutor Perini's 2024 Success
Part of the reason why construction stocks, like Tutor Perini, have surged in 2024 is due to heightened expectations. The construction industry is cyclical in nature, and when the year began, fears of a potential economic downturn still lingered.
Consequently, Tutor Perini did not garner much investor enthusiasm at the start of 2024, given that its operations are contingent on substantial projects funded by both government bodies and private sectors. However, the Fed managed to orchestrate a soft landing, decreasing interest rates without triggering a recession, while maintaining steady economic growth and low unemployment rates.
Up until the third quarter of 2024, Tutor Perini reported a 14% revenue growth, totaling $3.26 billion, albeit still reporting losses, primarily due to legal dispute resolutions and other matters.
Looking ahead, the company expects a resurgence to profitability in 2025 as it overcomes these disputes. From there, it anticipates earnings growth in 2026 and beyond.
Some of the notable projects Tutor Perini recently won include a $1.66 billion mass-transit project in Hawaii, a $1.1 billion water conveyance tunnel in New York, a multi-billion-dollar jail project in New York, and a $1 billion-plus healthcare campus in California. These victories have significantly boosted the company's backlog. It now stands at approximately 3.5 years' worth of revenue.
While the company remains unprofitable according to generally accepted accounting principles (GAAP) in 2024, it forecasts record operating cash flow of $425 million to $575 million for the year.
Will Tutor Perini's Ascent Continue in 2025?
At a market capitalization of $1.3 billion, Tutor Perini appears reasonably priced based on its price-to-sales (P/S) ratio. It's currently trading at a P/S of 0.3, showcasing its prospective profitability should it deliver on its promises.
The stock rose by 10% upon releasing its Q3 earnings report, indicating investor satisfaction with the surge in the backlog. However, these bookings now seem to be factored into the stock price. Investors now entertain high expectations for 2025, as the Wall Street consensus projects an adjusted $1.92 in earnings per share for the stock, resulting in a forward price-to-earnings (P/E) ratio of 12.8.
This is an attractive price for a cyclical stock like Tutor Perini, but considerable uncertainties surround it entering 2025. For example, the stock plummeted by 7% when the Fed revised its rate cut forecast for the following year from four to two, and the political influence of the Trump administration remains unclear. Tariffs, for instance, could increase material costs for contracts already signed, potentially denting profits.
If the economy remains robust in 2025, the stock should continue to increase as legal disputes are resolved and an abundant requirement for new infrastructure across the U.S. adds to demand.
It's not unreasonable to expect Tutor Perini's backlog to increase further into 2025. This growth may support even higher stock gains if the economy stays strong.
Given the strong performance of the construction industry in 2024, smart investors are now considering diversifying their portfolios by allocating funds towards finance-related activities, such as investing in construction-focused exchange-traded funds (ETFs) or individual construction stocks. For instance, the Invesco Construction ETF has seen significant gains, with a year-to-date increase of 22% and a surge of 40% before presidential announcements of tariffs.
To capitalize on this trend, one could consider investing in promising construction companies that have demonstrated steady growth. Tutor Perini, a renowned construction company, has experienced a remarkable year in 2024. Its backlog swelled sequentially by 35% to $14 billion, and it has reportedly won several large-scale projects. With a low price-to-sales ratio of 0.3 and high investor expectations for 2025, Tutor Perini's stock could potentially yield attractive returns, given a robust economic environment and resolutions to legal disputes.
