Sector Wrap: Construction, engineering shares drop

The Dow Jones U.S. Heavy Construction Index fell 22.09 points, or 3.2 percent, to 676.43 by early afternoon, while the Dow Jones industrial average gave up 8.96 points to 11,373.30.

Tahira Azfal said in a note to clients that a recent survey of state budgets indicated that growth in state spending would be slow during in fiscal 2009 versus 2008. This slower spending could negatively affect construction and engineering companies involved in areas such as civil engineering projects, health care and education.

The report, issued last month by the National Governors Association and the National Association of State Budget Officers, said state spending nationally will grow by just 1 percent in the fiscal year that begins in most states July 1. That's down from a 30-year average growth of 6.7 percent. It's also a considerable drop from the current year, which saw spending grow about 5 percent.

Azfal said some states could see midyear budget cuts by December, which means weaker visibility for construction and engineering companies that depend on government projects.

The analyst said Comfort Systems USA Inc. was especially exposed to business in health care and education, while a substantial portion of Emcor Group Inc.'s backlog is in health care, she said.

Jacobs Engineering Group Inc. could also see some weakness from lower state spending despite its strong exposure to lucrative energy markets, Azfal said.

She left her ratings on the companies unchanged. Azfal rates Comfort Systems and Emcor at "Hold" and Jacobs at "Buy."

Shares of heavy construction and engineering companies--which specialize in big, expensive capital projects--declined sharply. Comfort Systems shares fell 22 cents to $12.91. Emcor shares declined $1.70, or 6 percent, to $26.40. Jacobs Engineering shares gave up $2.75, or 3.4 percent, to $78.23.

Shares of Perini Corp. tumbled $2.96, or 9.3 percent, to $29. Shaw Group Inc. fell $2.42, of 3.9 percent, to $59.89. URS Corp. lost $2.41, or 5.7 percent, to $39.99.