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Bear of the Day

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Earnings estimates have fallen sharply for Quanex Building Products Corporation (NX - Snapshot Report) following disappointing first quarter results on March 7. It is a Zacks Rank #5 (Strong Sell) stock.

Although shares have sold off since the Q1 report, the stock still doesn't look cheap at 34x forward earnings. Investors may want to hold off on this stock until earnings momentum improves.

Quanex Building Products manufactures engineered materials, components and systems primarily for window and door original equipment manufacturers (OEMs). It reports is operations in two segments:

  • Engineered Products, which makes window and door components and other residential building products for OEMs, that primarily serve the residential construction and remodeling markets.
  • Aluminum Sheet Products, which are used in exterior housing trim, fascias, roof edgings, soffits, downspouts and gutters.

Q1 Earnings Miss

Quanex delivered disappointing results for the first quarter of its fiscal 2013 on March 7. The company reported an adjusted loss of 17 cents per share, which was below the Zacks Consensus Estimate calling for a loss of 6 cents. It was also the company's third straight earnings miss.

Net sales increased 15% to $185.7 million, driven by 7% growth in Engineered Products and 29% growth in Aluminum Sheet Products. Operating profits in the Engineered Products segment improved to $2.8 million, but this wasn't enough to offset a $4.2 million operating loss in the Aluminum Sheet Products division.

Estimates Falling

Despite a rebound in the housing market, management stated in the Q1 press release that its expects U.S. window shipments will only improve by approximately 5% this year. This prompted analysts to revise their estimates significantly lower for both 2013 and 2014, sending the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2013 is now $0.35, down from $0.58 ninety days ago. The 2014 consensus has fallen from $1.02 to $0.65 over the same period.

You can see the big decline in earnings estimates over the last several months in the company's 'Price & Consensus' chart:

Premium Valuation

Shares of NX are down more than 20% since the Q1 earnings release, but shares still a look a bit pricey here. The stock currently trades at 34x 12-month forward earnings, which is a significant premium to its 10-year historical median of 14x and the industry median of 20x.

Quanex Building Products also carries a long-term 'Underperform' Zacks Recommendation.

The Bottom Line

With declining consensus estimates and premium valuation, investors may want to avoid Quanex Building Products until its earnings momentum turns around. There are other stocks within the Building & Construction - Miscellaneous industry, however, that investors might want to consider based on their positive earnings momentum. Masco (MAS - Analyst Report) and Trex Company (TREX - Snapshot Report), for instance, both carry a Zacks Rank of 2 (Buy).

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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