While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best companies of the construction industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 14 were identified as being closely related to the construction industry.  Of those, none suitable for the Defensive Investor, seven are suitable for the Enterprising Investor, and the remaining seven are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 99.44% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 28.54.  The industry as a whole, therefore would appear to be fairly valued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

D.R. Horton Inc. (DHI)

D.R. Horton Inc. performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $1.33 in 2011 to an estimated $1.62 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 4.53% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

Lennar Corporation (LEN)

Lennar Corporation performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $1.95 in 2011 to an estimated gain of $2.63 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 4.64% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged over 30% annually. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

PulteGroup Inc. (PHM)

PulteGroup Inc. performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the inconsistent dividend history and the insufficient earnings stability or growth over the last ten years, while the Enterprising Investor is only concerned by the lack of earnings stability over the last five years. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $4.19 in 2010 to a gain of $2.05 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 1.01% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)

Quanta Services Inc. (PWR)

Quanta Services performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of dividend payments along with the high PEmg ratio, while the Enterprising Investor is only concerned with the lack of dividend payments. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $0.76 in 2010 to $1.37 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 6.15% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation on Seeking Alpha)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

Flowserve Corporation (FLS)

Flowserve should satisfy the Enterprising Investor but not the Defensive Investor. The Defensive Investor is concerned by the short dividend history and the high PB ratio, while the Enterprising Investor is only concerned by the level of debt relative to the net current assets. Therefore, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.41 in 2011 to an estimated $3.27 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 4.39% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 7.1%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating Flowserve is fairly valued at the present time.  (See the full valuation on Seeking Alpha)

The Full List

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