The Building Products – Retail industry comprises of U.S. home improvement retailers, manufactures of industrial and construction materials and distributors of wallboard and ceilings systems. Some of the industry participants also offer products and services for home decoration, repair and remodeling, and in-home delivery and installation services.

The industry players provide a wide array of products, ranging from cement or concrete foundation materials to roofing boards and shingles. The companies also sell lumber, insulation materials, drywall, plumbing fixtures, hard-surface flooring, lawn and garden, and decor products. Some players also deal in threaded fastener products, and manufactured and natural stone tiles. The industry players cater to professional homebuilders, sub-contractors, remodelers and consumers.

Let’s take a look at the industry’s three major themes:
 

• The industry’s prospects remain closely tied to the U.S. housing market conditions. Favorable housing market fundamentals along with robust construction activities indicate bright industry prospects. Construction spending in the United States has risen of late, supported by a steady increase in outlays on private residential and government projects. Further, home improvement retailers like The Home Depot Inc. (HD Quick QuoteHD - Free Report) are poised to benefit from strong demand for repairs and remodeling activities as rising incomes encourage investments in homes and renovations. Moreover, rising home sales, which tend to stimulate spending on building products, is a plus. The U.S. housing market is likely to be on a roll, thanks to increased demand for new homes on lower mortgage rates, solid economic growth and favorable demographics.
   
• The building products industry is focusing on digitalization and innovation. The industry participants have undertaken strategies to connect offline and online channels to bolster growth, with improved customer engagement and supply-chain access. Retailers are embracing a completely integrated digital platform to cater to growing online purchases. Additionally, initiatives to boost Pro customer sales with enhanced service capabilities like tool rental, delivery and the B2B website are supporting the top and bottom lines. Meanwhile, the industry participants are increasingly focusing on pricing of products and other actions to offset higher input expenses.
   
• Increasing supply chain costs and escalating operating expenses are weighing on companies’ margins. Unfavorable product mix and adverse sales mix as well as and higher shrink have been hurting gross margins. Further, rise in commodity or raw material costs and transportation expenses as well as higher cost of investments toward technological advancements are likely to act as deterrents. Commodity price deflation in lumber and copper are also concerning.

Zacks Industry Rank Indicates Bright Prospects

The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. It carries a Zacks Industry Rank #73, which places it at the top 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Shareholder Returns

The Zacks Building Products – Retail Industry has outperformed both the S&P 500 and its own sector in the past year.

While the stocks in this industry have collectively gained 30.1%, the Zacks S&P 500 composite has moved up 25.4%. Meanwhile, the Zacks Retail-Wholesale sector has witnessed growth of 20% over this period.

One-Year Price Performance

Building Products – Retail Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is the commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 20.57X compared with the S&P 500’s 19.19X. Further, the sector’s forward-12-month P/E stands at 25.64X.

Over the last five years, the industry has traded as high as 21.61X and as low as 16.02X, with the median being at 19.2X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Improving economic backdrop and higher home prices might drive sustainable growth for the Building Products – Retail industry. Additionally, home improvement retailers stand to gain from increased demand for repairs and remodeling. Efforts to expand digital platforms and product innovation are likely to improve customer experience. However, increasing supply chain costs and escalating operating expenses, along with higher lumber prices raise concerns.

We have one stock in the Zacks Building Products – Retail universe that currently sport a Zacks Rank #1 (Strong Buy) and one other with a Zacks Rank 2 (Buy). We also highlight three other stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look:

Builders FirstSource, Inc. (BLDR Quick QuoteBLDR - Free Report) : This Dallas, TX-based supplier of building materials and manufactured components has soared 119.2% in the past year. The Zacks Consensus Estimate for its next fiscal year’s earnings has been stable in the last seven days. Further, the stock has a Zacks Rank #1.

Price and Consensus: BLDR

BMC Stock Holdings, Inc. : This Raleigh, NC-based distributor of lumber and building materials has rallied 90.4% in the past year. The Zacks Consensus Estimate for its next fiscal year’s earnings has been revised 0.5% upward in the last 60 days. Further, the stock has a Zacks Rank #2.

Price and Consensus: BMCH

Lowe’s Companies Inc. (LOW Quick QuoteLOW - Free Report) : The stock of this Mooresville, NC-based home improvement retailer has risen 31.7% in the past year. The Zacks Consensus Estimate for its next-year EPS has not moved in the past 30 days. The company has a long-term earnings growth rate of 14% and a Zacks Rank #3.

Price and Consensus: LOW

Fastenal Company (FAST Quick QuoteFAST - Free Report) : This Winona, MN-based wholesale distributor of industrial and construction products has gained 21.7% in the past year. The Zacks Consensus Estimate for its next-year EPS has been stable in the past 30 days. The company has a long-term earnings growth rate of 14%. The company currently has a Zacks Rank #3.

Price and Consensus: FAST

GMS Inc. (GMS Quick QuoteGMS - Free Report) : The stock of this Tucker, GA-based distributor of wallboards, suspended ceilings systems, and building products has risen 56.7% in the past year. The Zacks Consensus Estimate for its next-year EPS has been stable in the last seven days. The company has a long-term earnings growth rate of 7%. It currently has a Zacks Rank #3.

Price and Consensus: GMS

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