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5 Stocks to Tap Rising Demand in Retail Building Products Space

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Favorable housing market trends have brightened up matters for the Zacks Building Products – Retail industry. The space, which mainly caters to home renovation and construction needs, is also gaining from accelerated DIY projects undertaken amid the ongoing coronavirus pandemic. These apart, players are gaining from elevated trends in the digital arena, and are investing in enhancing omni-channel offerings.

Continuation of such upsides are likely to benefit industry participants like The Home Depot, Inc. (HD - Free Report) , Lowe’s Companies Inc. (LOW - Free Report) , Fastenal Company (FAST - Free Report) , Builders FirstSource, Inc. (BLDR - Free Report) and Lumber Liquidators Holdings, Inc. (LL - Free Report) .

About the Industry

The Zacks Building Products – Retail industry comprises 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.

3 Trends Shaping the Future of Building Products Industry

Robust Housing Market: The Retail Building Products industry, which is highly dependent on economic and U.S. housing market conditions, is expected to gain from the housing market rebound. The recent decline in mortgage rates (below 3%) has been driving home sales, which, in turn, is likely to lead to a modest spike in demand for building products in the near term. Markedly, pending home sales, new home sales and existing home sales rose 8.8%, 4.8% and 2.4%, respectively in August. Robust fundamentals of the U.S. housing industry are expected to be a boon for the industry participants in the future.

Surging Repair & Remodeling Activities: With majority time being spent indoors due to the pandemic scenario, there is a rising focus on making homes an enjoyable and comfortable space. Home DIY projects for remodeling, decorating and maintenance of furniture and fixtures are being widely undertaken. Building products companies have been gaining from rising sales of home improvement products, ranging from outdoor and indoor fixtures and appliances. Apart from essentials, these retailers are witnessing higher demand for gardening and other stay-at-home activities related products such as paint and tool kits.  Industry players are therefore ramping up production to meet rising demand trends. This should aid top-line performance. Meanwhile, home improvement retailers are incurring additional costs to provide enhanced benefits to associates at stores and distribution centers. These increased costs are likely to put pressure on margins.

Focus on Digitization: Retail Building Products industry participants have been focusing on digitization and innovation. The industry participants have been on track with strategies to bolster omni-channel capabilities, with improved customer engagement. In fact, such prudent measures have been helping the industry players to effectively meet the accelerated demand conditions amid the pandemic. Companies are also ramping up their delivery operations in order to provide safe and swift services, especially to Professional (Pro) customer. The boom in digital transactions should continue to drive the top line of key industry players.

Zacks Industry Rank Indicates Solid Prospects

The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #15, which places it in the top 6% 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 position 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 gradually gaining confidence in this group’s earnings growth potential. Since Apr 30, 2020, the industry’s earnings estimate for the current year has increased 22.5%.

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 Vs. Broader Market

The Zacks Building Products – Retail industry has outperformed the Zacks S&P 500 but has underperformed the broader Zacks Retail-Wholesale sector over the past year.

The industry has gained 28.8% over this period compared with the S&P 500’s rise of 15.8%. Meanwhile, the broader sector has moved up 40.9% in the said time frame.

One-Year Price Performance


 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is the commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 26.34X compared with the S&P 500’s 23.66X. Further, the sector’s forward-12-month P/E stands at 41.25X.

Over the last five years, the industry has traded as high as 27.39X and as low as 17.14X, with the median being at 22.41X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Building Products Stocks to Keep a Close Eye on

We are suggesting two Zacks Rank #1 (Strong Buy) stocks and a Zacks Rank #2 (Buy) stock from the Zacks Building Products – Retail universe. We are also presenting two stocks with a Zacks Rank #3 (Hold) each 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: This Dallas, TX-based supplier and manufacturer of building materials has been gaining from higher demand for its integrated services, backed by improved housing market data, low mortgage rates and shift to suburban living. This Zacks Rank #1 company has been active on the acquisition front, which has been supporting top-line growth. It is also engaged in disciplined cost management practices. Importantly, estimates for Builders FirstSource 2020 earnings have been revised 58% higher over the past 60 days. Moreover, the company delivered a trailing four-quarter earnings surprise of 51%, on average. Impressively, the stock has rallied about 61% in the past year.

Price and Consensus: BLDR



Lumber Liquidators: This Richmond, VA-based company is a leading specialty retailer of hard-surface flooring materials and accessories. The company, which currently sports a Zacks Rank #1, has been gaining from its transformational plans and measures to boost financial flexibility.  Its investments in omni-channel platform have been reaping benefits. Markedly, the company has seen more than five-fold upward revision in 2020 earnings estimates over the past 60 days. The stock has more than doubled in the past year.

Price and Consensus: LL




Lowe’s Companies: The Mooresville, NC-based home improvement retailer has been gaining from its sturdy retail-fundamentals strategies alongside advancements in the digital channel. The company has been working toward boosting contactless delivery operations and plans to install self-service pickup lockers across stores. It has been undertaking measures to boost sales to pro customers and augmenting pro-focused brands. Shares of this Zacks Rank #2 company have surged 56% in the past year. The company has seen upward estimate revisions for its fiscal 2020 earnings over the past 60 days by 25.8%. Moreover, the company has a trailing four-quarter earnings surprise of 17.2%, on average.

Price and Consensus: LOW




The Home Depot: This Atlanta, GA-based home improvement retailer follows a flexible interconnected infrastructure, which has helped it to quickly adapt to changing customer preferences. This Zacks Rank #3 company has been gaining from broad-based strength across stores and geographies as well as growing presence in the digital arena. The company is working toward boosting omni-channel functions such as curbside pickup and buy online pickup in store services with convenient pickup lockers. The company has seen 11% upward revision in fiscal 2020 earnings estimates over the past 60 days. Moreover, the company has a trailing four-quarter earnings surprise of 1.3%, on average. Impressively, the stock has rallied about 23.1% in the past year.

Price and Consensus: HD



Fastenal Company: This Winona, MN-based wholesale distributor of industrial and construction products has been gaining from the installation of vending machines. Further, this Zacks Rank #3 company is striving to boost onsite locations portfolio. The company has also implemented prudent cost control measures to curtail pressure stemming from rising operating expenses. Fastenal is also working toward expanding e-commerce presence. The company has seen 2% upward revision in 2020 earnings estimates over the past 60 days. Moreover, the company has a trailing four-quarter earnings surprise of 5.6%, on average. Impressively, the stock has rallied about 45.6% in the past year.

Price and Consensus: FAST



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