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This Construction Stock Has Nearly Tripled This Year. Can It Keep Gaining In 2025?
In 2024, there have been plenty of winners in the stock market. While tech stocks have gotten much of the attention from investors, other sectors have also performed well. One of the more overlooked ones is construction, which is benefiting from strong demand, infrastructure spending from the government, and hopes that Fed rate cuts will lower borrowing costs.
For example, the Invesco Building & Construction ETF is up 22% year to date, but through Nov. 25, it was up 40%. That was before President-elect Trump announced his intention to slap 25% tariffs on Canada and Mexico, and to add a 10% tariff on goods coming from China.
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Even with that setback, a number of individual construction stocks have still delivered monster returns this year. Tutor Perini (NYSE: TPC), for example, is up 171% year to date, as the chart below shows.
The diversified construction company, whose projects include public works like bridges and jails as well as privately held real estate, has seen demand soar this year. In the third quarter, its backlog jumped 35% sequentially to $14 billion, topping a previous record of $11.6 billion set in 2019. This is a sign that the business is recovering from an earlier slowdown.
Image source: Tutor Perini.
Why Tutor Perini stock is on fire this year
Part of the reason construction stocks like Tutor Perini have surged this year has to do with expectations. The construction sector is highly cyclical, and at the beginning of the year, there were still some concerns that the economy could slide into a recession.
As a result, investors weren't particularly bullish on Tutor Perini at the start of 2024, as its business depends on multi-billion-dollar projects from governments and the private sector. However, the Fed has pulled off the soft landing, lowering rates without crashing the economy, and the unemployment rate remains low, while economic growth is steady.
Through the first three quarters of 2024, Tutor Perini has grown revenue by 14% to $3.26 billion, though it still reported losses, primarily due to the resolution of legal disputes and other matters.
Looking ahead, the company now expects a return to profitability in 2025 as it puts those disputes behind it. From there, it sees earnings growth in 2026 and beyond.
Among the projects it 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. Those have all sent the company's backlog soaring. It now stands at roughly 3.5 years' worth of revenue.
While the company is unprofitable on a generally accepted accounting principles (GAAP) basis this year, it sees record operating cash flow of $425 million to $575 million for the year.
Can Tutor Perini keep climbing in 2025?
At a market capitalization of $1.3 billion, Tutor Perini still looks cheap on a price-to-sales (P/S) basis. It's trading at a P/S of 0.3, showing there's a lot of leverage if the company can deliver the profits it's promised.
The stock jumped 10% on the Q3 earnings report, showing that investors were pleased with the surge in the backlog, but those bookings are now priced in. Investors now seem to have high expectations heading into 2025. The Wall Street consensus is calling for $1.92 in adjusted earnings per share, giving the stock a forward price-to-earnings (P/E) of 12.8.
That's a good price for a cyclical stock like Tutor Perini, but there's a lot of uncertainty around it heading into 2025. For example, the stock fell 7% when the Fed trimmed its forecast for rate cuts next year from four to two, and the influence of the Trump administration is still unclear. Tariffs, for example, could raise costs for key materials, putting a dent in profits for the contracts the company has already signed.
If the economy remains strong in 2025, the stock should continue to move higher with those legal disputes out of the way and a clear need for new infrastructure across much of the U.S. contributing to demand.
Don't be surprised to see Tutor Perini's backlog continue to grow into 2025. That should help support further gains in the stock if the economy stays healthy.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
