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On Nov 28, we upgraded our recommendation on NCI Building Systems Inc. (NCS - Analyst Report), a metal building components maker, to Neutral. While the company is likely to face challenges from volatile steel prices and incremental operating cost, it will benefit from a strong backlog, cost-cutting initiatives and a positive mix shift.

Why the Upgrade?

On Sep 4, NCI Building reported third-quarter fiscal 2013 (ended Jul 28, 2013) adjusted earnings of 2 cents per share, a 60% year over year slump and significantly behind the Zacks Consensus Estimate of 12 cents. Total revenues increased 6% year over year to $317 million, but missed the Zacks Consensus Estimate of $348 million.

NCI Building, a Zacks Rank #3 (Hold) stock, remains committed to improve its manufacturing process and efficiency through investments. During the third quarter, the company invested around $2.3 million to focus on augmenting distribution channels, production capabilities and customer responsiveness.

In Aug 2013, a fire damaged two ovens at the Jackson, Miss. coatings facility of NCI Building. However, the company resumed shipping within a few days and quickly shifted production to other facilities. This will result in incremental operating cost of $0.5–$1 million in the fourth quarter.

On the other hand, the Metl-Span acquisition will position NCI Building as a leader in the insulated metal panel business by diversifying and expanding its existing product range. NCI Building will also benefit from a growing customer base as well as a distribution network in North America.

In early 2013, NCI Building reopened its Metal Coaters Coil Coating Facility in Middletown, Ohio. With the opening of this facility, the company will extend its coil coating operations into the upper Midwest and Northeast. Moreover, the light-gauge paint line has ramped up production and remains on track to become profitable in the fourth quarter of 2013.

However, the Dodge Momentum Index dipped 0.9% in October compared with the previous month, mainly due to the uncertain political and economic environment stemming from the government shutdown that month and debt ceiling deliberations. Thus, developers remain cautious about the economic scenario.

Furthermore, the company noted that low-rise non-residential construction starts have declined in the first nine months of fiscal 2013, suggesting that the market is unlikely to recover sufficiently to deliver annual growth in volumes.

Other Stocks to Consider

Other stocks in the same industry with a favorable Zacks Rank are CaesarStone Sdot-Yam Ltd. (CSTE - Snapshot Report) and James Hardie Industries plc with a Zacks Rank #1 (Strong Buy), and Simpson Manufacturing Co., Inc. (SSD - Snapshot Report) with  a Zacks Rank #2 (Buy).

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