The building products industry seems to be on solid footing, aided by favorable household formation trends and a strengthening macro backdrop. Elevated construction spending in the United States, an impressive labor market scenario, moderate inflation and Trump’s impetus to boost infrastructure spending appear as key growth catalysts for the industry.
Construction spending in the United States has ramped up lately, supported by a steady increase in outlays on private as well as public construction projects. Sustained growth in construction activity drives demand for the companies’ products, thereby boosting profitability.
Moreover, expectation of a more-intense-than-normal hurricane season will likely work in favor of building product companies. There is a 75% chance that the 2018 Atlantic hurricane season will be near- or above-normal, per the National Oceanic and Atmospheric Administration (NOAA). Notably, NOAA’s forecasters predict a 70% likelihood of 10 to 16 named storms, of which five to nine could become hurricanes, including one to four major ones. Such disasters usually lead to a pick-up in home repairing work, proving advantageous for companies in the building materials/products space.
That said, there are concerns that are impeding the industry’s growth to some extent. Political and economic uncertainties continue to be deterrents for the industry. Limited land availability, higher land/labor and material costs as well as a constrained mortgage environment are restricting the companies from responding to the growing demand. Then again, higher demand, a booming economy along with solid job market will keep the momentum alive.
Industry Performance versus the Sector
The Zacks Building Products Industry, which is a 26-stock group within the broader Zacks Construction Sector, has outperformed its sector over the past year, though the industry as well as the sector have lagged the broader market.
While stocks in this industry have collectively gained 7.1% over the past year, the Zacks Construction Sector has rallied 4.7%. The gains have been especially supported by ramped up residential construction activity, leading to higher demand for building products.
One-Year Price Performance
One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings. Typically, a lower P/E ratio is better.
The Building Products- Miscellaneous industry’s valuation looks fairly valued when compared with its own range. The industry currently has a forward 12-month P/E ratio of 12.4X, which is close to the lowest level touched over the past year. When compared with the one-year high of 18.02X and median level of 14.31X over that period, there is apparently plenty of upside left.
The space looks cheap when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 18X while the industry is currently trading at 12.4X forward 12-month earnings estimates.
Moreover, the industry is also trading at a discount to the Zacks Construction sector, as the chart below shows:
Earnings Outlook Weak
What really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.
One reliable measure that can help investors understand the Building Products industry’s prospects for a solid price performance is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with the last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line shows the same for 2018.
Price and Consensus: Building Products-Miscellaneous Industry
This becomes clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $2.82 EPS estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Building Products-Miscellaneous industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings per share of the industry for 2018, but how this number has evolved recently.
Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings potential.
Current Fiscal Year EPS Estimate Revision
As you can see here, the EPS estimate for 2018 is down from $2.88 at the end of February 2018 to $2.86 at the end of April 2018. In other words, the sell-side analysts covering the companies in the Zacks Building Products industry have been steadily lowering their estimates.
Zacks Industry Rank Indicates Solid Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term.
The Zacks Building Products industry currently carries a Zacks Industry Rank #43, which places it in the top 17% of more than 250 Zacks industries. 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.
Building Products Promise Long-Term Growth
The long-term (3-5 years) EPS growth estimate for the Zacks Building Products industry appears promising. The group’s mean estimate of long-term EPS growth rate has been rising since January 2018 to reach the current level of 12.2%. This compares to 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-term EPS growth could be a steady top line that the industry has shown since 2016. The growth can be attributed to increased demand from the housing market.
Though there might be some bottlenecks in the near future due to political and economic uncertainties which continue to affect the industry, the larger picture looks convincing. The industry is expected to tide over the broader challenges in the near term.
With demand from the residential and non-residential space remaining robust, the industry is expected to perform well. So it may be a good idea to bet on this space right now, keeping the long-term expectations in mind. Investors could take advantage of the cheap valuation and pick a few building product stocks which have a strong earnings outlook.
Here are four stocks with positive earnings estimate revisions and a bullish Zacks Rank.
NCI Building Systems, Inc. (NCS - Free Report) carries a Zacks Rank #1 (Strong Buy). The expected earnings growth rate for the current year is 77.5%. The Zacks Consensus Estimate for current-year earnings has risen 9.2% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: NCS
United Rentals, Inc. (URI - Free Report) carries a Zacks Rank #2 (Buy). The expected earnings growth rate for the current year is 50.6%. The Zacks Consensus Estimate for 2018 earnings has moved up 2% over the last 60 days. The stock has gained 26.1% in a year’s time.
Price and Consensus: URI
Foundation Building Materials, Inc. (FBM - Free Report) sports a Zacks Rank #2. The expected earnings growth rate for the current year is 62.9%. The Zacks Consensus Estimate for current-year earnings has climbed 1.8% over the last 60 days. The stock has rallied 19.8% in a year’s time.
Price and Consensus: FBM
Armstrong World Industries, Inc. (AWI - Free Report) carries a Zacks Rank #2. The expected earnings growth rate for the current year is 22.9%. The Zacks Consensus Estimate for 2018 earnings has moved up 0.3% over the last 60 days. The stock has gained 51.6% in a year’s time.
Price and Consensus: AWI
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