Construction Stock Index Plunges

No one who is breathing needs to be told what happened on Wall Street, and, yes, Main Street, this year. Subprime mortgages started the dominoes falling, and dubious financial instruments like credit default swaps kept it going until the entire economy was under siege. Markets were off in the first quarter, mixed in the June quarter and definitely negative in the third quarter.

Just before our yearly wrap-up closed, numbers-watchers were saying that the economy has been in a recession since December 2007. Any number of economic benchmarks might agree, yet the stock market has recently seen its first extended rally in many months. Though the climate remains volatile, investors are hoping for a bottom.

"We've got a tug-of-war going on," said Al Goldman, chief market strategist at Wachovia Securities in St. Louis. "On one side there's the prospect of several more months of bad economic news, and on the other side there's lots of stimulus already on the table."

However, homebuilders are not seeing any relief, as new home sales in October fell to the lowest rate in almost 18 years, and prices in October dropped to the levels last seen in 2004. "The broader housing market needs fewer homes," said Wachovia Corp. economist Adam York. "We built too many homes in the United States, and building less is one way to work off the excess inventory."

The Construction Stock Index went on an undulating ride this year, down almost 16 percent in the March quarter, up a fraction in the June quarter, and tumbling over 23 percent in the September period. Of the 30 companies covered in the index, no components ended in the black, and the top losers were truck makers Daimler and Oshkosh. To close the year ended Dec. 1, 2008, the Construction Stock Index was down 915.36 points, or 35.97 percent, and ended at 1629.57. Although certainly not rosy, the Construction Stock Index fared better than the major market indices.

Although Pulte Homes said it will cancel its dividend payments beginning in the first quarter of 2009, Pulte shed the fewest points this year, off only 0.92 points in the 12-month period. Pulte was up over 38 percent in the first period, then down almost 34 percent, then in the September period up over 45 percent, to 13.97. Pulte fell in November on a downgrade. Citigroup analyst Josh Levin cut his rating on Pulte to "hold" from "buy." Levin said Pulte's near-term liquidity is robust, but said that the company's stock was overvalued.

"Looking forward, it appears that a bottom in the housing market may not come for some time," said Pulte CEO Richard Dugas Jr. in late October. Dugas suggested a combination of a one-time tax credit and a temporary mortgage rate buy-down. Pulte ended the year at 9.30, a loss of 9 percent.

Daimler was the top dollar loser this year, down a whopping 73.48 points (though U.S. Steel was not too far behind with a loss of 72.06 points). Daimler was down over 10 percent in the March quarter, down almost 28 percent in the June quarter and down just over 18 percent in the fall quarter. Global sales were off 18 percent in October, and Mercedes-Benz sales were down 25 percent in the U.S. for the same period.

Although Daimler said in late November that it plans to help dealers' losses with an infusion of $66.3 million, and add another $12.5 million to get new models into showrooms, the company warned that it would not meet its 2008 yearly forecast. The company said that its truck business has come "almost to a standstill."

Cerberus, the private capital management firm that purchased Daimler's Chrysler last year, said that Daimler "intentionally and materially" misled Cerberus before Chrysler was purchased last year. "[Cerberus] expected Chrysler to be one thing, and in fact, it turned out to be something quite different," said Peter Henning, an attorney who teaches at Wayne State University Law School in Detroit. "It's simply a statement that this company was a lot worse off than Cerberus thought when they got into the deal."

Daimler said that Cerberus did its due diligence on the company before it was purchased. "We reject these allegations as being completely without substance," said Daimler spokesman Han Tjan. Daimler shed 72.27 percent and ended at 28.19.

Granite Construction was another construction component that has held up fairly well under the financial onslaught. GVA was down the first two quarters of 2008, but by modest amounts, and up over 13 percent in the September quarter when everyone else was tanking. Granite rose sharply after its third quarter results zoomed past analysts' expectations for the period. Granite said net income dropped to $51.7 million, but earnings per share increased to $1.36, from net income of $53.3 million and EPS of $1.28 last year.

Analysts surveyed by Thompson Reuters expected Granite to earn $1.01 per share. Revenue also exceeded analysts' expectations, at $897.8 million. Wall Street expected $848 million in revenues. Goldman Sachs analyst Chris Hussey upped his rating on Granite to "neutral" from "sell," saying that the company has attractive valuation. Hussey also said the company would benefit from anticipated upticks in federal highway outlays. Granite Construction shed 2.69 points, or 6.56 percent, and was the smallest percentage loser in the index. GVA closed at 38.33.

Oshkosh was also caught in the crosshairs this year, dropping by substantial amounts each quarter. In the March quarter, Oshkosh lost over 23 percent, in the June quarter almost 43 percent, and in the September quarter over 36 percent. In early September, S&P cut the company's credit rating to "BB-" from "BB," citing softer demand. The company had almost $3 billion in debt as of June 30.

Part of the question mark is the debt the company took on in its acquisition of JLG Industries. "It made the purchase in an all-debt deal, and it is paying it down, but it's not making as much money as it had thought, putting it in a tougher financial situation," said Brian Rayle, an analyst at FTN Midwest Securities. In October, stakeholders filed a lawsuit claiming that Oshkosh CEO Robert Bohn OK'd financial statements that were more optimistic than conditions warranted. Court documents allege that Bohn covered up news of weaker demand during a year period in which he sold over $5 million in Oshkosh stock. Oshkosh lost 42.27 points, or 87.90 percent, and was the top percentage loser this year. Oshkosh ended at 5.82.

Note:

Deere had a 2:1 stock split effective 12-4-07.

Cummins had a 2:1 stock split effective 1-3-08.

Fluor had a 2:1 stock split effective 7-16-08.

Volvo was delisted from the NASDAQ on 12-13-07, and was removed from the index.

CIT was removed from the index;

Wells Fargo was added.