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Simpson Manufacturing Downgraded to Strong Sell

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On Sep 26, Zacks Investment Research downgraded Simpson Manufacturing Co., Inc. (SSD - Snapshot Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

On Jul 25, Simpson Manufacturing reported second-quarter 2013 earnings of 38 cents per share, up 15% from the year-earlier quarter. This leading manufacturer of wood construction products has delivered negative earnings surprises in 5 out of the past 8 quarters.  

Though total revenue improved 8% to $196 million in the quarter, sales were affected negatively by economic conditions in Europe, reduced home center sales and lower selling prices in the United States, Canada and Europe.

Net sales to home centers decreased partly as a result of the loss of Lowe's Companies Inc. (LOW - Analyst Report) as a customer in the second quarter of 2012. Lowe’s had accounted for $5.3 million in sales in the second quarter of 2012. For the full year 2012, it had an impact of $11 million. On a trailing 12 months basis, management estimated the effect in the range of $20 million to $23 million. The loss of Lowe’s as a customer is going to weigh on Simpson Manufacturing.

The building construction sector is one of the principal markets for Simpson Manufacturing. In June, housing starts unexpectedly fell to the lowest level in almost a year to 836,000 units. Housing starts recovered somewhat to 8,83,000 units in July and 8,91000 in August. Though this is above the Jun 2013 figure, it was below expectations and also below the peak of just over 1 million in Mar 2013.

Moreover, recent rise in mortgage rates has made builders cautious about breaking ground on new projects. This puts a question on the expected recovery in the housing sector, which would have benefited Simpson Manufacturing. Furthermore, given the continuing weak demand backdrop in Europe, results are expected to be affected in the region.

Simpson Manufacturing witnessed sharp downward estimate revisions after announcing its second quarter fiscal 2013 results. In the past 60 days, the Zacks Consensus Estimate for fiscal 2013 decreased 6% to 99 cents a share, while that for fiscal 2014 went down 7% over the last 30 days to $1.29.

Other Stocks to Consider

Not all stocks are performing as poorly as Simpson Manufacturing. Building and machinery-construction stocks worth considering include CaesarStone Sdot-Yam Ltd. , PGT, Inc. (PGTI - Snapshot Report) which hold a Zacks Rank #1 (Strong Buy).

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