The building and construction industry has outperformed the market since the beginning of the Sharetrack competition due to a switch out of telecoms, media and technology (TMT) stocks, strong industry statistics, notable earnings upgrades and an overhang of potential consolidation stories. But this trend goes against the grain of recent years, whereby most international buil ding companies have failed to keep up with the strong bull market run.
Given the market's fixation with growth-oriented investment opportunities, cyclical industries such as construction have been somewhat sidelined. Yet this is not to say that stocks within the sector cannot outperform. CRH is a case in point, delivering a compound annual return of 22 per cent in shareholder value since 1970. Indeed, CRH displays many characteristics necessary to succeed in this sphere: a wide geographic footprint, a balanced product portfolio, the strongest of management teams and an ability to deliver successful acquisitions.
In searching for such earnings enhancing models, Sharetrack investors should look to firms exposed to fast growing economies.
For example, volumes are forecast to grow in the Irish construction sector by 12 per cent and 10 per cent in 2000 and 2001 respectively, underpinned by strong economic and demographic fundamentals. Similarly, the impact of government capital expenditure should not be underestimated for example, the US Transportation Efficiency Act authorises the expenditure of $155 billion (€173 billion) on road transport and is the largest highway bill since 1956.
Investors should not overlook the current wave of consolidation fuelled by the desire for scale and diversification. Having already witnessed the takeover of largecap companies such as Tarmac, Pioneer and Rugby at substantial premiums, the hunt for potential prey is continuing, as evidenced by Lafarge's recent (but failed) bid for Blue Circle. On a smaller scale, Irish-based Grafton Group (which owns Chadwicks and Woodies) is one of the top five British merch anting companies.
But Sharetrack investors must also understand the impact of likely interest rate increases, given the sector's sensitivity to movements in this key variable. It remains to be seen whether concerns in the economic cycle will shake the bricks and mortar of the sector.
Goodbody acts as broker to Grafton.
Laura De Voy is a researcher in the private client department of Goodbody Stockbrokers.
