A Firm Foundation for Building Gains


By Sam Stovall A recent addition to the High Momentum List is the Standard & Poor's 1500 Construction and Engineering subindustry index (its relative strength price chart is shown below). This index consists of nine large-, mid- and small-cap companies.

Jacobs Engineering (JEC

; recent price: $51) and URS Corp. (URS

; $33) are ranked buy, while Shaw Group (SGR

; $19) is a sell, and Insituform Technologies (INSU

; $15), is rated a strong sell. Fluor Corp. (FLR

; $57) is ranked hold, while the remaining companies carry no recommendations.

POWER UP. During 2004, this subindustry index gained 19%, compared to a 10% advance for the S&P 1500. So is there any upside potential left? Here's what Stewart Scharf, S&P's construction and engineering analyst, has to say about the investment outlook for the group:

"We expect better global market conditions and increased funding to spur capital spending for both commercial and federal projects. Spending by state and local governments may lag the recovery a bit, but with new awards starting to pick up and some projects that were suspended during 2004 resuming, we maintain our positive fundamental outlook on the group."

On the power sector, Scharf believes that it "will continue to recover, albeit slowly, following one of its worst downturns ever. Several construction and engineering companies have already seen increases in new awards for power projects.

CLEAN FUELS BOOST. Furthermore, "new construction contracts to support U.S. military operations in the Middle East should continue to benefit some companies in this group, although we think more funds will be allocated to security-related projects in Iraq than to infrastructure-related projects to rebuild the country," says Scharf. "Additionally, we expect more infrastructure projects to eventually be awarded to Iraqi contractors. We also believe that more funding will be directed towards other areas of defense and homeland security."

The analyst adds, "We expect capital spending to gradually increase after a new transportation bill (SAFE-TEA), which we think will approach the $300 billion mark, is likely approved, probably by mid-2005."

"However, with increased funding slated for tsunami aid and other disasters, we think that highway funding may be reduced," notes Scharf. But "new bookings should rise over the next decade for clean fuels program-related projects, such as removing sulfur from diesel and aviation fuel, as vehicle manufacturers must meet new regulations by 2007."

LIKELY FUTURE ADVANCES. Scharf expects improving demand for "projects in the petroleum, pharmaceutical, biotechnology, and chemical sectors. The recent passage of an energy bill should also increase bookings for oil and gas exploration projects." Also, "long-term prospects are brighter, in our view, for investments in Latin America, Asia, Eastern Europe, and the Middle East, as most global construction and engineering companies focus on developing regions to energize growth."

So there you have it. The subindustry's fundamental outlook and current momentum are in agreement, in our opinion, pointing to likely future advances in share prices.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), and their proxies (the highest STARS-ranked companies in the sub-industry index-tie goes to the largest market value) as of May 6, 2005.

Industry

Company

Ticker

S&P STARS Rank

Recent Price

Commodity Chemicals

Lyondell Chemical

LYO

3

$27

Construction & Engineering

Jacobs Engineering

JEC

4

$51

Construction Materials

Vulcan Materials

VMC

3

$57

Distillers & Vintners

Brown-Forman

BF.B

5

$57

Diversified Metals & Mining

Phelps Dodge

PD

4

$89

Fertilizers & Agr. Chem.

Scotts Co.

SMG

4

$73

Homebuilding

Lennar

LEN

5

$53

Managed Health Care

PacifiCare

PHS

5

$62

Oil & Gas Drilling

Nabors Industries

NBR

5

$56

Oil & Gas E&P

Devon Energy

DVN

4

$45

Oil & Gas Refg. & Mktg.

Valero Energy

VLO

5

$68

Steel

Carpenter Technology

CRS

4

$56

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S, have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.

Disclaimers

This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Stovall is chief investment strategist for Standard & Poor's


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