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Can the Downer share price climb to a record high by end of 2019?

The Downer EDI Limited (ASX: DOW) share price jumped higher this morning and is within striking distance of its record high after the construction engineering group announced a new contract win.

The Downer share price increased 0.6% to $8.15 and is not far off the $8.52 record it hit a decade ago. The question on investors’ mind is whether the group can push to new highs this side of Christmas.

The stock suffered a big sell-off in the middle of 2019 but it’s been on a comeback since. This puts Downer’s share price gain at around 20% since the start of the year, or inline with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

Downer scores in Perth

Downer is part of the NEWest Alliance, which was picked as the preferred contractor on the Yanchep Rail Extension and the Thornlie-Cockburn Link. The projects are part of Perth’s METRONET program.

There’s no mention of the size of the contract or what it could mean for Downer’s bottom-line, although management said the scope of work includes railway construction, relocation of freight lines, station platform extensions, station construction and other station modifications, construction of new road-over-rail bridges and other associated work.

Design work on the project will commence immediately and construction will start in May 2020. The project is scheduled to be completed by 2023 – assuming no project blowouts or delays.

Tricky projects and valuation clouds stock

Delivering on rail and infrastructure projects can be tricky as Lendlease Group (ASX: LLC) found out for its part in Melbourne’s Metro Rail project.

Throw in the fact that Downer’s valuation is starting to look fully valued, and one might think the group needs another good announcement or three to push its share price into new record territory by year-end.

Brokers polled on Reuters are divided on the stock too. Of the eight covering the stock, four rate it a “buy” with the rest evenly distributed across “hold” and “sell”. The average price target on Downer is $7.91, which is a little below where the stock is currently sitting.

Foolish takeaway

But I think it’s too early to be throwing in the towel as the medium-term outlook for Downer is bright. The infrastructure building spree has only really just begun and the waning economy will force the federal government to accelerate spending on nation building.

This puts Downer in a good spot and those with a longer-term view shouldn’t be discouraged from buying the stock.

Another stock in the sector that I think is worth putting on the buy list is Seven Group Holdings Ltd (ASX: SVW). Its exposure to construction comes from the rental of heavy earthmoving equipment – and there’s a lot of earth to move over the next few years.

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Motley Fool contributor Brendon Lau owns shares of Downer EDI Limited and Seven Group Holdings Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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