The Zacks Building Products - Miscellaneous industry primarily comprises manufacturers, designers and distributors of home improvement and building products like ceiling systems, doors and windows, as well as flooring and metal products. Some of the industry players provide solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries.
A few industry participants also offer glass fiber that is utilized to support composite materials for transportation, electronics, marine, infrastructure, wind energy as well as roofing for residential, commercial and industrial applications. The companies also manufacture expansion joints and structural bearings, ventilation products, ground mounted solar racking and commercial greenhouses, as well as mail storage (solutions including mailboxes and package delivery products).
Moreover, companies under this industrial cohort rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities.
Let’s take a look at the industry’s three major themes:
- The industry is poised to benefit from robust construction activities and a strengthening macro backdrop. 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. Trump’s impetus to boost infrastructure spending appears as key catalyst to the industry’s growth.
- As the industry’s prospects are highly correlated with U.S. housing market conditions and repair and remodeling activity, the prevailing slowdown in the U.S. housing market may prove detrimental. Concerns surrounding affordability and rising mortgage rates have been denting home sales lately. As home sales tend to spur spending for building products, the latest slowdown in home sales is expected to hurt demand. Meanwhile, higher raw material costs kept margins under pressure. Steel and aluminum tariffs, announced earlier in 2018, continue to impact material costs. Rising logistics and distribution costs are also compressing margins further.
- Nonetheless, the industry participants are increasingly focusing on pricing of products to offset the higher input and freight expenses. Cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions are also supporting bottom line growth. The companies are also following a systematic acquisition strategy to enhance domestic and international portfolios.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Building Products – Miscellaneous industry is a 24-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #226, which places it at the bottom 12% 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 dismal 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 bottom 12% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since July 2018, the industry’s earnings estimate for the current year has gone down by approximately 5.3%.
Despite the industry’s gloomy near-term view, we will present a few building products stocks that one can hold on to. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags on Stock Market Performance
The Zacks Building Products – Miscellaneous industry has lagged the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.
Over this period, the industry has declined 28.6% versus the broader sector’s decline of 26% and the S&P 500’s decline of 1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing building products’ stocks, the industry trades at 8.1X versus the S&P 500’s 15.8X and the sector’s 11.1X.
Over the past five years, the industry has traded as high as 18.6X, as low as 8.1X and at the median of 14.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Focus on expanding footprint and product portfolio through acquisitions, along with cost-saving initiatives, are expected to drive the industry’s growth. Also, investing in new products, support services as well as advanced manufacturing capabilities should boost revenues. However, rising freight as well as raw material costs might keep margins under pressure.
None of the stocks in the Zacks Building Products - Miscellaneous space currently sports a Zacks Rank #1 (Strong Buy). So, here we present five stocks that investors may want to hold on to for the time being.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PGT Innovations, Inc. (PGTI - Free Report) : Headquartered in North Venice, FL, this is the nation's leading manufacturer and supplier of residential impact-resistant windows and doors. The consensus estimate for 2018 earnings indicates year-over-year growth of 93.4%. This Zacks Rank #3 (Hold) company has delivered average positive earnings surprise of 33.4% in the trailing four quarters. EPS estimates for the current year have witnessed upward revision of 8.3% in the past 60 days.
Armstrong World Industries, Inc. (AWI - Free Report) : This, Lancaster, PA based designer, manufacturer, and seller of ceiling systems, mainly used for construction and renovation of residential and commercial buildings worldwide, has a Zacks Rank #3. The Zacks Consensus Estimate for 2018 EPS indicates year-over-year growth of 23.8%. In the past 60 days, EPS estimates have witnessed upward revision of 0.3%.
Continental Building Products, Inc. (CBPX - Free Report) : This Herndon, VA based manufacturer of gypsum wallboard, joint compound and complementary finishing products has a Zacks Rank #3. The consensus estimate for 2018 earnings indicates year-over-year growth of 55.6%. In the past 60 days, EPS estimates for the current year have witnessed upward revision of 2%.
NCI Building Systems, Inc. (NCS - Free Report) : This Houston, TX based integrated manufacturers of metal products for the building industry has an expected earnings growth rate of 81.3% for the current year. The Zacks Rank #3 company reported better-than-expected EPS over the past four quarters, with the average being 29.8%. EPS estimates for 2018 have been stable over the past 60 days.
United Rentals, Inc. (URI - Free Report) : This Stamford, CT based equipment rental company has a Zacks Rank #3. The consensus estimate for 2018 earnings indicates year-over-year growth of 53.3%. For the current year, EPS estimates have witnessed upward revision of 0.8% in the past 60 days.
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