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We have maintained our Underperform recommendation on metal building components maker NCI Building Systems Inc. (NCS - Analyst Report). Our view reflects volatile steel prices, the company’s dependence on a few steel suppliers and the impact of sequestration.

Why the Reiteration?

NCI Building, on Jun 4, reported loss per share of 28 cents in the second quarter of 2013, affected by weather-related plant closures and shipment delays as well as additional costs related to marketing and sales. However, revenues rose 17% year over year to $293.4 million in the reported quarter, mainly contributed by the Metl-Span acquisition and the success of its cross-selling initiatives.

The second quarter also saw steeper marketing and sales cost that impacted margins. Margins were also hurt by poor weather conditions, which caused project delays.

While the company is poised to gain from the expected recovery in nonresidential construction, investments in growth initiatives and ramp-up of new plants, we are concerned about the volatility of steel prices and dependence on few steel suppliers.

One of the important raw materials for NCI Building is steel and the company is considerably influenced by the steel prices. The steel industry is cyclical in nature and steel prices have remained highly volatile in recent years. The prices may remain volatile in future causing margin headwinds.

Moreover, the impact of sequestration and a still weak global economic environment remain concerns. Adverse weather conditions also remain as headwinds for the upcoming quarters.

Other Stocks to Consider

Other stocks in the same industry with a favorable Zacks rank are CaesarStone Sdot-Yam Ltd. (CSTE - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and Masco Corporation (MAS - Analyst Report)  and PGT, Inc. (PGTI - Snapshot Report) with  a Zacks Rank #2 (Buy).
 

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