Public works a bright spot emerging in construction

BANGALORE Thu Oct 22, 2009 2:00pm EDT

BANGALORE (Reuters) - The U.S. construction industry may have long crumbled under the weight of a slumping economy, but a glimmer of hope is seen in the public works sector, helped by a pickup in federally funded projects.

Companies such as Granite Construction (GVA.N), URS Corp URS.N, Jacobs Engineering Group (JEC.N) and Aecom Technology Corp (ACM.N) are expected to gain in 2010, when a major portion of the stimulus funds will be made available.

Growth in public works projects "is important at this juncture because you are really not going to see much expansion from the commercial and residential sectors," said Robert Murray, vice president at industry research firm McGraw-Hill Construction.

The housing bust in the United States that crippled the broader economy led to huge job losses in the country's $1 trillion construction industry.

Although the economy is showing signs of recovery, commercial construction still lags the general trend, partly hurt by the retail slowdown.

On the other hand, public construction is projected to grow 14 percent to $136.3 billion in 2010, with a wider range of projects emerging, McGraw-Hill said in a report.

Public construction, which traditionally meant highways and bridges, will broaden its spectrum by encompassing works such as water treatment and sewer systems, and hospital, airport and courtroom upgrades next year.

The trend will be driven by highway and bridge construction starts, estimated to grow 13 percent in 2010, and by an expected 18 percent jump in environmental works starts.

The $787 billion federal stimulus plan approved early this year has about $130 billion allocated for public construction.

The next two years will see more work involving a lot of engineering and design jobs, benefiting firms such as Jacobs, Aecom and URS, said Michael Dudas of Jefferies & Co.

A major portion of this year's funds is allocated to low-margin projects such as repavement of roads, which will primarily benefit smaller contractors, Macquarie Research analyst Sameer Rathod said.

Companies such as Granite Construction, which gets half its revenue from highway construction, will see a pickup in 2010, when about 60 percent of the construction stimulus is to be released.

"With the second wave of projects next year...there will be larger and more meaningful works that Granite can participate in," Rathod said.

Analysts expect the thrust given to various clean-tech and energy management projects such as smart grid to have a longer-term revenue impact, as these contracts will play out over a number of years.

However, analysts are concerned about the time lag on return on investments, as contributions from the fresh projects will take a year to convert into hard cash.

"We can start to see new awards pick up sometime next year, but revenue will start picking up toward the end of 2010 and in 2011," Barclays analyst Andy Kaplowitz said.

RUSH FOR CONTRACTS

With no near-term recovery seen, hard-hit companies in the residential and commercial sectors are now vying for public projects, and as a result, competition is growing and margins are under pressure.

"What used to be three to four bidders for a project has now grown to 20 to 25 bidders, and all that is driving construction margins down," said Cliff Brewis, senior director at McGraw-Hill Construction.

However, larger projects next year will limit competition to an extent, as such contracts require more financing and labor.

"There are only a handful of companies that can handle billion-dollar rail projects," analyst Will Gabrielski of Broadpoint Amtech said.

Competition in the highly fragmented industry also opens up opportunities on the consolidation front.

Small firms will look at mergers and joint ventures to handle backlog, while private contractors, armed with lots of small contracts, will be attractive buys for public companies, analysts said.

"A lot of firms will eventually have to consolidate given that times are tough and they will have to start sharing their backlog," Jefferies' Dudas said.

(Reporting by Divya Sharma and Bijoy Koyitty; Editing by Anne Pallivathuckal)