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Is now the right time to buy these leading construction businesses?

It was a strong week for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) last week with the index gaining 2.7%. The gains in the index however were nothing compared to the gains experienced by a number of leading engineering, construction and mining service contractors…

Over the five trading days, Transfield Services Limited (ASX: TSE), Downer EDI Limited (ASX: DOW), Leighton Holdings Limited (ASX: LEI) and UGL Limited (ASX: UGL) surged 27.3%, 16%, 12.7% and 10.3% respectively.

In the case of operations and maintenance contractor Transfield the cause of the gains was obvious – the group received a takeover approach pitched at $1.95 which was a significant premium to its last traded price.

Engineering, construction and asset management firm Downer EDI also saw some corporate action which encouraged investors to buy stock last week after the firm announced it had agreed to buy leading utilities business Tenix for $300 million.

Civil engineering, construction and contract mining group Leighton last week updated the market with two positive developments. Firstly, the group announced it had been successful in being selected as part of a consortium to build a rail corridor project in Victoria; this consortium also included UGL. Secondly, Leighton announced a very pleasing set of third quarter results which showed underlying profit grew 21% to $470 million.

Buy, Hold, or Sell?

There could still be opportunities to make money in these four stocks despite last week’s double-digit gains.

Investors looking for a takeover arbitrage opportunity will obviously be drawn to Transfield and the potential for a higher offer to emerge.

Downer’s acquisition announcement could lead to an upgrade in the earnings outlook for the group which would provide scope for increased valuations and hence now could be an attractive buying opportunity.

Leighton’s restructuring appears to be on track with the group reporting a strengthened balance sheet and nearly $38 billion of work-in-hand. While the stock price has already rallied significantly from its 52-week low, if the market becomes increasingly confident in the firm’s outlook then it potentially could rally further.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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