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3 Top Building Products Industry Stocks to Buy Despite Headwinds
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The current U.S. housing market slowdown, continued supply-chain bottlenecks, investments in new products and higher raw material costs have been compressing margins for companies under the Zacks Building Products - Miscellaneous industry. That said, higher government spending for infrastructural enhancement has been aiding the industry players. Companies like United Rentals, Inc. (URI - Free Report) , Hillman Solutions Corp. (HLMN - Free Report) and Janus International Group, Inc. (JBI - Free Report) are set to benefit from operational excellence, geographic and product diversification strategies, accretive buyouts and higher infrastructural spending.
Industry Description
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 industry players provide solutions to rehabilitate the aging infrastructure, primarily pipelines in wastewater, water, energy, mining and refining industries. 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 along with package delivery products). Companies in this industrial cohort also rent out equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners as well as government entities.
3 Trends Shaping the Future of the Building Products Industry
Supply Chain & Inflationary Woes: Inflationary headwinds with respect to transportation costs, material costs and energy costs owing to supply-chain disruptions have been a pressing concern. Also, rising labor costs are compressing margins. These are dampening the companies’ operating performance. Rising costs related to steel, asphalt, resin and other input materials are compressing margins. Although the companies have been working to recover higher costs through various price increases, they expect this ongoing volatility in material and transportation costs to persist in the near term. Meanwhile, the companies have been witnessing short-term project delays due to material and labor shortages that are impacting upstream building activity. This may result in a lower backlog in the near term.
Apart from higher raw material costs, the companies bear expenses related to product launches. If companies are unable to offset these costs through price increases or supply-chain initiatives, their profits may be affected.
Also, as the industry players’ business prospects are highly correlated with U.S. housing market conditions and repair and remodeling activity, the current slowdown in the market has been impacting the company’s performance.
U.S. Administration’s Infrastructural Spending: The industry players are expected to benefit from strong global trends in infrastructure modernization, energy transition, national security, and a potential super-cycle in global supply-chain investments. The U.S. administration’s endeavor to rebuild the nation’s deteriorating roads and bridges and fund new climate-resilient and broadband initiatives is expected to aid the companies.
Operational Excellence, Product Innovation & Acquisitions: The industry participants have been carrying out strong cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions to boost profitability. Industry participants have also been strategically investing in new products, sales and support services, digitally enabled solutions as well as advanced manufacturing capabilities to boost revenues. The companies are also following a systematic acquisition strategy to supplement organic growth, and expand access to additional markets as well as products.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Building Products – Miscellaneous industry is a 27-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #212, which places it in the bottom 15% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of tepid 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 October 2022, the industry’s earnings estimates for 2023 have been revised 1.5% downward to $3.82 per share.
Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags S&P 500 & Sector
The Zacks Building Products – Miscellaneous industry has underperformed the broader Zacks Construction sector but outperformed the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 18.8% compared with the broader sector’s 16.6% decrease and the S&P 500’s decline of 19.1%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing building products’ stocks, the industry is trading at 12.7X versus the S&P 500’s 17.3X and the sector’s 14.2X.
Over the past five years, the industry has traded as high as 19.9X, as low as 6.9X and at a median of 13.1X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
United Rentals: Headquartered in Stamford, CT, United Rentals is the largest equipment rental company in the world. This company has been gaining from better fleet productivity on broad-based rental demand in construction and industrial verticals. It remains optimistic for 2023 courtesy of growth opportunities across its verticals, with persistent growth opportunities for data centers, distribution centers and renewables as well as the automotive and ship plants projects.
URI, a Zacks Rank #1 stock, has gained 14.9% over the past year. URI has seen an upward estimate revision of 0.9% for 2023 earnings over the past 30 days to $37.14 per share. The company’s earnings for 2023 are expected to increase 14.2%.
Price and Consensus: URI
Hillman Solutions: Based in Cincinnati, OH, this company provides hardware-related products and related merchandising services in North America. The company believes that near-record homeowner’s equity in homes and an aging U.S. housing stock will provide a meaningful driver of home improvement projects for the future. This will give the company an opportunity in meaningful repair, remodel and maintenance activity. Notably, HLMN has estimated 90% exposure to repair, remodel and maintenance activity. Again, pricing actions to offset the high costs owing to complex labor and supply chain issues are adding to the positives.
HLMN, a Zacks Rank #2 stock, has lost 17.1% over the past year. That said, HLMN’s 2023 earnings estimate has increased to 33 cents from 30 cents over the past seven days.
Price and Consensus: HLMN
Janus International Group: This Temple, GA-based company manufactures and supplies turn-key self-storage and commercial and industrial building solutions. The company has been generating solid contributions from all of its sales channels, led by Commercial & Other and R3 sales channels. Productivity improvements and commercial actions, including pricing, are expected to drive growth. The company is expected to benefit from its one-stop-shop offering with a leading market share in self-storage doors and related design and installation services.
JBI, a Zacks Rank #2 stock, has lost 15.4% over the past year. That said, JBI has seen an upward estimate revision of 3.5% for 2023 earnings over the past 30 days to 88 cents per share. The company’s earnings for 2023 are expected to increase 16.9%.
Price and Consensus: JBI
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3 Top Building Products Industry Stocks to Buy Despite Headwinds
The current U.S. housing market slowdown, continued supply-chain bottlenecks, investments in new products and higher raw material costs have been compressing margins for companies under the Zacks Building Products - Miscellaneous industry. That said, higher government spending for infrastructural enhancement has been aiding the industry players. Companies like United Rentals, Inc. (URI - Free Report) , Hillman Solutions Corp. (HLMN - Free Report) and Janus International Group, Inc. (JBI - Free Report) are set to benefit from operational excellence, geographic and product diversification strategies, accretive buyouts and higher infrastructural spending.
Industry Description
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 industry players provide solutions to rehabilitate the aging infrastructure, primarily pipelines in wastewater, water, energy, mining and refining industries. 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 along with package delivery products). Companies in this industrial cohort also rent out equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners as well as government entities.
3 Trends Shaping the Future of the Building Products Industry
Supply Chain & Inflationary Woes: Inflationary headwinds with respect to transportation costs, material costs and energy costs owing to supply-chain disruptions have been a pressing concern. Also, rising labor costs are compressing margins. These are dampening the companies’ operating performance. Rising costs related to steel, asphalt, resin and other input materials are compressing margins. Although the companies have been working to recover higher costs through various price increases, they expect this ongoing volatility in material and transportation costs to persist in the near term. Meanwhile, the companies have been witnessing short-term project delays due to material and labor shortages that are impacting upstream building activity. This may result in a lower backlog in the near term.
Apart from higher raw material costs, the companies bear expenses related to product launches. If companies are unable to offset these costs through price increases or supply-chain initiatives, their profits may be affected.
Also, as the industry players’ business prospects are highly correlated with U.S. housing market conditions and repair and remodeling activity, the current slowdown in the market has been impacting the company’s performance.
U.S. Administration’s Infrastructural Spending: The industry players are expected to benefit from strong global trends in infrastructure modernization, energy transition, national security, and a potential super-cycle in global supply-chain investments. The U.S. administration’s endeavor to rebuild the nation’s deteriorating roads and bridges and fund new climate-resilient and broadband initiatives is expected to aid the companies.
Operational Excellence, Product Innovation & Acquisitions: The industry participants have been carrying out strong cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions to boost profitability. Industry participants have also been strategically investing in new products, sales and support services, digitally enabled solutions as well as advanced manufacturing capabilities to boost revenues. The companies are also following a systematic acquisition strategy to supplement organic growth, and expand access to additional markets as well as products.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Building Products – Miscellaneous industry is a 27-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #212, which places it in the bottom 15% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of tepid 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 October 2022, the industry’s earnings estimates for 2023 have been revised 1.5% downward to $3.82 per share.
Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags S&P 500 & Sector
The Zacks Building Products – Miscellaneous industry has underperformed the broader Zacks Construction sector but outperformed the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 18.8% compared with the broader sector’s 16.6% decrease and the S&P 500’s decline of 19.1%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing building products’ stocks, the industry is trading at 12.7X versus the S&P 500’s 17.3X and the sector’s 14.2X.
Over the past five years, the industry has traded as high as 19.9X, as low as 6.9X and at a median of 13.1X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
3 Building Product Stocks to Buy Now
We have selected three stocks from the Zacks universe of building products that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
United Rentals: Headquartered in Stamford, CT, United Rentals is the largest equipment rental company in the world. This company has been gaining from better fleet productivity on broad-based rental demand in construction and industrial verticals. It remains optimistic for 2023 courtesy of growth opportunities across its verticals, with persistent growth opportunities for data centers, distribution centers and renewables as well as the automotive and ship plants projects.
URI, a Zacks Rank #1 stock, has gained 14.9% over the past year. URI has seen an upward estimate revision of 0.9% for 2023 earnings over the past 30 days to $37.14 per share. The company’s earnings for 2023 are expected to increase 14.2%.
Price and Consensus: URI
Hillman Solutions: Based in Cincinnati, OH, this company provides hardware-related products and related merchandising services in North America. The company believes that near-record homeowner’s equity in homes and an aging U.S. housing stock will provide a meaningful driver of home improvement projects for the future. This will give the company an opportunity in meaningful repair, remodel and maintenance activity. Notably, HLMN has estimated 90% exposure to repair, remodel and maintenance activity. Again, pricing actions to offset the high costs owing to complex labor and supply chain issues are adding to the positives.
HLMN, a Zacks Rank #2 stock, has lost 17.1% over the past year. That said, HLMN’s 2023 earnings estimate has increased to 33 cents from 30 cents over the past seven days.
Price and Consensus: HLMN
Janus International Group: This Temple, GA-based company manufactures and supplies turn-key self-storage and commercial and industrial building solutions. The company has been generating solid contributions from all of its sales channels, led by Commercial & Other and R3 sales channels. Productivity improvements and commercial actions, including pricing, are expected to drive growth. The company is expected to benefit from its one-stop-shop offering with a leading market share in self-storage doors and related design and installation services.
JBI, a Zacks Rank #2 stock, has lost 15.4% over the past year. That said, JBI has seen an upward estimate revision of 3.5% for 2023 earnings over the past 30 days to 88 cents per share. The company’s earnings for 2023 are expected to increase 16.9%.
Price and Consensus: JBI