NCI’s Near-term Outlook Remains Bleak

NCI Building Systems Inc. (NCS - Analyst Report) is witnessing sharp decline in demand for its products due to weak non-residential construction activity. Commercial projects are either being delayed or cancelled due to extremely difficult economic conditions and severe credit crunch. This is having an adverse impact on the company’s sales. For the first half of fiscal 2009, NCI reported lower revenue in all the three of its reporting segments compared to the year-ago level.

As per McGraw-Hill Construction Information Group’s forecast, non-residential construction market is expected to witness a 24% in square footage and a 19% decline in dollar value in 2009. Given the significant decline in activity levels in the commercial construction market and lack of credit availability, the near term outlook for NCI remains bleak.

In light of difficult market conditions, the company is realigning its operations. The company has completed the first two phases of its cost reduction program in February 2009 and approved the third phase in April. These actions are expected to result in annualized savings of approximately $120 million. We applaud the company’s move to cut costs and reduce capital expenditure in the current economy. However, this would not fully offset the impact of deteriorating market conditions on the company’s earnings.

Moreover, we are extremely concerned about the company’s liquidity situation. The company is engaged in negotiations to refinance its existing debt agreements. NCI indicated that it is in advanced stages of negotiations with a leading private equity firm with regard to a substantial equity investment in the company. But, this would be dilutive to the existing shareholders. Until NCI successfully refinances its existing debt agreements or receives a large equity infusion, we believe investors should stay on the sidelines.