Buys for Commercial and Industrial Construction Exposure

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Activity in the commercial/non-residential construction sector, including institutional projects such as hospitals and schools, tends to lag that of the housing market. In light of the ongoing positive metrics in the home-building industry, such as rising housing starts and new home sales, along with dwindling supply, commercial and industrial spending is apt to remain on the upswing as well.

Participants in these markets have been apparently aiming to boost their positions in such sectors in anticipation of demand improvements. This has been largely by way of mergers and moderately-sized acquisitions. Accordingly, shares of the consolidators might have price upside potential, as likely earnings gains are not fully discounted yet.

The benefits of the Cooper acquisition may take hold

The November 2012 buyout of Cooper Industries considerably enhanced Eaton's  (NYSE: ETN) proportion of electrical products, systems, and services revenue. Thus far, combined bookings for such products have been down slightly. But, Eaton will be well positioned for when the market turns positive, possibly in the second half of this year or beyond then. Certainly, Eaton will realize the gains from operating cost synergies and its increased capabilities as far as being a single source for project management in electrical and power management.

Because of Cooper and other acquisitions, Eaton should be a long-term profit gainer. Some earnings dilution was created by the issuance of shares for the Cooper buyout and investors may want to await positive year-over-year earnings comparisons. However, at the current quotation, the shares have appeal as a company with breadth and size in the electrical equipment industry.

Hubbell is purely focused on electrical and power products

Hubbell (NYSE: HUB-B) started off 2013 with modest bottom-line growth, behind higher volumes and acquisitions, along with productivity gains. Its outlook, though, was cut from the end of the year in terms of non-residential product sales advances for this year. Management now envisions low single-digit percentage growth in that market for this year, along with a similar rate of increase in the utility end market, some increase in transmission-project spending, slight gains in industrial, and double-digit expansion in residential spending.

The company serves as a predictor for the entire electrical-products industry. The bulk of its business is derived from commercial, industrial and institutional sources, such as for retrofit projects. A more pronounced upturn in this activity would allow for Hubbell to thrive. As for acquisitions, its most notable last year was of Continental Industries, a maker of HVAC offerings.

Hubbell serves as a predictor of overall electrical-equipment market conditions. Its balance sheet is sound, providing the means for further tuck-in buyouts. Plus, it is also focused on research and development, a bit atypical in the largely cyclical electrical-equipment sector. I like the shares for their exposure to this market as a long-term holding.

United Technologies is about more than just aerospace

I have previously written up Dow giant United Technologies (NYSE: UTX) for its currently booming aerospace units. Over the long haul, it should also realize profit growth from its legacy commercial building subsidiaries, namely Otis (elevators), and Carrier (HVAC), as well as its fire and security operation that it expanded through an asset purchase from GE.

The company may be subject to the timing of major projects, as well as market trends, for improved results from these businesses. Management has not focused substantial resources on expansion of its construction-related segments. For that matter, it is not investing in R&D for those product lines to a great extent. It is taking restructuring measures, allowing for margin improvements, however.

To put it into numbers, Otis, together with United Tech's Climate Controls and Security arm, posted a 1% decline in operating profits for the March quarter, while United Tech watched its Aerospace Systems business soar. When it all comes together, United Tech is an exceptional company. As such, it is a good purchase for long-term buy and hold investors and those banking on near-term momentum from its aerospace units.

The rundown

The Architectural Billings Index, a measure of design and construction activity, has remained on the upturn, albeit slowly. Should this metric start to climb (note that any number above 50 indicates improvement), commercial construction would be on the cusp of a more visible growth stage. Investors may want to accumulate shares of these companies while valuations are below the market average, and thus benefit from such an event.

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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