NATICK, MASSACHUSETTS-After reaching near-record levels in the first three quarters of 2007, and averting most of the negative sentiment that plagued the broader economy, market values of architecture, engineering, construction, and environmental consulting firms (AEC/E) finally slowed to a 5% pace at year-end. The ZweigWhite 15 (ZW15), a market-weighted index designed to track the performance of publicly-traded AEC/E firms in the U.S., ticked up 55 points in the fourth quarter to close at $1,309.61 for the year.
"Unfortunately, the overall economy did not fare as well over the same period and it appears as if it will head lower in 2008. Skepticism has been making its way into financial headlines with news of falling housing prices, tightening credit, record-breaking oil and commodity prices, and a sluggish holiday spending season", says Michael S. O'Brien, a principal with ZweigWhite who specializes in financial advisory services. The Standard & Poor's (S&P) 500 Index closed down 3% in the fourth quarter, reflecting investors' fears that a recession may be on the horizon.
Despite collateralized debt obligations and the subprime mess having also shaken financial institutions abroad, foreign stocks showed resiliency. The S&P 700 Index, a measure of the international economy (not including the effect of American firms), advanced slightly last quarterfavorable in comparison to the decline experienced by the S&P 500. The ZweigWhite International (ZWI), an index that tracks non-U.S. firms, closed higher than its international economic benchmark and exhibited similar results to the ZW15. Leading the ZWI was Fugro NV (FUR:NA) (Ledschendam, the Netherlands), AMEC plc (AMEC:LN) (London, United Kingdom), and SNC-Lavalin Group (SNC:CN) (Montreal, Canada). However, the ZWI ended 2007 on a negative note as it declined on a downward trend.
Jacobs Engineering Group (JEC) (Pasadena, CA) led the ZW15 and represented the AEC/E industry among the best performing stocks of the year. Jacobs exceeded analysts' estimates with a 42.9% year-over-year revenue growth primarily due to its continued success in the oil service sector, which has been driven by high oil prices. Jacobs' success translated into a soaring stock price, sending the company to the year's 10 best performers within the S&P 500 Index. Other positive contributors to the ZW15 included Hill International (HINT) (Marlton, NJ), Stantec (SXC) (Edmonton, Alberta), and The Shaw Group (SGR) (Baton Rouge, LA).
But even the AEC/E industry was not left unscathed from the volatility that occurred in other areas of the market. A slice of the uncertainty of corporate profits slithered into the world of design and construction. Despite strong earnings reports, some firms succumbed to the forecasts of cynics. EMCOR Group (EME) (Norwalk, CT), TRC Companies (TRR) (Windsor, CT), and Versar (VSR) (Springfield, VA) all posted especially strong financial results but disappointed Wall Street with unsatisfactory future outlooks. Ecology & Environment (EEI) (Lancaster, PA) underperformed as it experienced a reduction in revenues from the U.S. Department of Defense and a decreasing number of projects and clients in the Middle East.
Even with these declines in the short run, the ZW15 ended nearly 31% above the level at which it was introduced in June 2007 at $1,000. Since its inception, performance of the ZW15 has far surpassed the U.S. economy as measured by the S&P 500. Growth constraints of the AEC/E industry remain similar to those from a year ago, including a short supply of qualified professionals and escalating labor costs. However, the taking back of early gains gives greater comfort that investors are taking a breather to bring some sensibility to current valuations to companies in the AEC/E industry.
ZweigWhite is the nation's leading source of management consulting, information, and education for the design and construction industry. ZweigWhite brings together experts in strategic business planning, organization, operations, business valuation, ownership transition, human resources, recruitment, finance and administration, information technology, mergers and acquisitions, market research, marketing, project management and project delivery methods. The firm is headquartered in Chicago, IL, with additional offices in Natick, MA, San Francisco, CA, and Washington, DC.
