Early signs of improved capital investment in the U.S. in certain end markets in the engineering and construction space are starting to lead to backlog growth developing, organic revenue growth accelerating and early signs of profit margin improvement, says Alex Rygiel, a Managing Director at FBR Capital Markets & Co.
“Certain end markets that are favorable right now include domestic telecom, capex for both wireline and wireless infrastructure, domestic electric transmission and domestic gas pipeline, particularly in the shale regions. These are trends we are seeing throughout the engineering, planning and construction phases,” he said.
Rygiel has Dycom Industries Inc. (DY), a smaller-cap stock with $750 million, as his top pick in the E&C sector. The average E&C company is trading at 5.5 times 2012 enterprise value to EBITDA, which is below the historical 15-year average of 9.5 times trailing EBITDA. Rygiel says he believes this is an early sign of improving fundamentals that are not yet appreciated in the valuations of these securities.
“The company has seen accelerating backlog and revenue growth and pretty meaningful margin expansion over the last several years. It is a company that historically was a pure-play telecom wireline contractor that has recently started to expand into wireless,” he said.
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