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4 Stocks to Buy From a Thriving Building Products Industry
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Higher government spending for infrastructural enhancement has been aiding the companies under the Zacks Building Products - Miscellaneous industry. Although the current U.S. housing market slowdown, continued supply-chain bottlenecks, investments in new products and higher raw material costs may keep margins under pressure, companies like Otis Worldwide Corporation (OTIS - Free Report) , United Rentals, Inc. (URI - Free Report) , Simpson Manufacturing Co., Inc. (SSD - Free Report) and Installed Building Products, Inc. (IBP - 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
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. Meanwhile, although the slowdown of the U.S. residential market is taking a toll on a few housing-inclined companies’ performances, persistent share growth opportunities for certain non-residential areas are expected to drive growth.
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.
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 also hurting margins. Although the industry participants 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.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products – Miscellaneous industry is a 26-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #69, which places it in the top 28% 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 positive 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 top 50% of the Zacks-ranked industries is a result of a solid 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 January 2023, the industry’s earnings estimates for 2023 have been revised 0.5% upward to $3.76 per share.
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 Lags Sector, Outperforms S&P 500
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 gained 4.2% compared with the broader sector’s 4.4% rise. Meanwhile, the Zacks S&P 500 composite has declined 10.2% over the same period.
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 13.5X versus the S&P 500’s 18.5X and the sector’s 15.2X.
Over the past five years, the industry has traded as high as 19.9X, as low as 6.9X and at a median of 13.5X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Installed Building Products: Based in Columbus, OH, this company is one of the nation's leading new residential insulation installers and a diversified installer of complementary building products. The company is poised to gain from favorable pricing strategies, geographic and product diversification strategies, as well as solid acquisitions despite the cyclicality of the U.S. housing market. IBP continues to prioritize profitable growth through its proven strategy of acquiring well-run installers of insulation and complementary building products. In 2022, IBP completed eight acquisitions representing approximately $109 million of annual revenues. For 2023, IBP expects to acquire at least $100 million in annual revenues.
IBP, a Zacks Rank #1 stock, has gained 40.5% over the past year. IBP has seen an upward estimate revision of 13.3% for 2023 earnings over the past 60 days to $8.44 per share. This depicts analysts’ optimism about the company.
Price and Consensus: IBP
Simpson Manufacturing: This Pleasanton, CA-based company designs, engineers and manufactures high-quality wood and concrete building construction products. It has been benefiting from product price increases and key growth initiatives. Despite a challenging operating environment, SSD has been gaining from the impact of product price increases implemented throughout 2021 to offset rising material costs as well as from the ETANCO acquisition. The company remains well positioned for 2023, given its focus on the expansion of growth initiatives into new markets, including commercial, OEM, national retail and building technology, along with a solid market position.
SSD, a Zacks Rank #1 stock, has gained 2.7% over the past year. SSD has seen an upward estimate revision of 10.6% for 2023 earnings over the past 60 days to $6.46 per share. This company surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 20.7%.
Price and Consensus: SSD
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 #2 stock, has gained 13.6% over the past year. URI has seen an upward estimate revision of 0.6% for 2023 earnings over the past 30 days to $41.92 per share. The company’s earnings for 2023 are expected to increase 29%.
Price and Consensus: URI
Otis: Based in Farmington, CT, Otis is one of the leading elevator and escalator manufacturing, installation and service companies. Otis’ primary focus on innovation is core to its strategy. The company connects global R&D efforts through an operating model that sets global and local priorities based on customer and segment needs. Its focus is on innovation and expansion of the digital ecosystem, and a suite of digital solutions for both existing service portfolio customers and new equipment shipments from factories.
OTIS, a Zacks Rank #2 stock, has gained 12% over the past year. This company surpassed earnings estimates in all of the trailing four quarters, with the average surprise being 4.6%. The company’s earnings for 2023 are expected to increase 8.2%.
Price and Consensus: OTIS
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4 Stocks to Buy From a Thriving Building Products Industry
Higher government spending for infrastructural enhancement has been aiding the companies under the Zacks Building Products - Miscellaneous industry. Although the current U.S. housing market slowdown, continued supply-chain bottlenecks, investments in new products and higher raw material costs may keep margins under pressure, companies like Otis Worldwide Corporation (OTIS - Free Report) , United Rentals, Inc. (URI - Free Report) , Simpson Manufacturing Co., Inc. (SSD - Free Report) and Installed Building Products, Inc. (IBP - 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
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. Meanwhile, although the slowdown of the U.S. residential market is taking a toll on a few housing-inclined companies’ performances, persistent share growth opportunities for certain non-residential areas are expected to drive growth.
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.
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 also hurting margins. Although the industry participants 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.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products – Miscellaneous industry is a 26-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #69, which places it in the top 28% 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 positive 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 top 50% of the Zacks-ranked industries is a result of a solid 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 January 2023, the industry’s earnings estimates for 2023 have been revised 0.5% upward to $3.76 per share.
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 Lags Sector, Outperforms S&P 500
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 gained 4.2% compared with the broader sector’s 4.4% rise. Meanwhile, the Zacks S&P 500 composite has declined 10.2% over the same period.
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 13.5X versus the S&P 500’s 18.5X and the sector’s 15.2X.
Over the past five years, the industry has traded as high as 19.9X, as low as 6.9X and at a median of 13.5X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 Building Product Stocks to Buy Now
We have selected four 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.
Installed Building Products: Based in Columbus, OH, this company is one of the nation's leading new residential insulation installers and a diversified installer of complementary building products. The company is poised to gain from favorable pricing strategies, geographic and product diversification strategies, as well as solid acquisitions despite the cyclicality of the U.S. housing market. IBP continues to prioritize profitable growth through its proven strategy of acquiring well-run installers of insulation and complementary building products. In 2022, IBP completed eight acquisitions representing approximately $109 million of annual revenues. For 2023, IBP expects to acquire at least $100 million in annual revenues.
IBP, a Zacks Rank #1 stock, has gained 40.5% over the past year. IBP has seen an upward estimate revision of 13.3% for 2023 earnings over the past 60 days to $8.44 per share. This depicts analysts’ optimism about the company.
Price and Consensus: IBP
Simpson Manufacturing: This Pleasanton, CA-based company designs, engineers and manufactures high-quality wood and concrete building construction products. It has been benefiting from product price increases and key growth initiatives. Despite a challenging operating environment, SSD has been gaining from the impact of product price increases implemented throughout 2021 to offset rising material costs as well as from the ETANCO acquisition. The company remains well positioned for 2023, given its focus on the expansion of growth initiatives into new markets, including commercial, OEM, national retail and building technology, along with a solid market position.
SSD, a Zacks Rank #1 stock, has gained 2.7% over the past year. SSD has seen an upward estimate revision of 10.6% for 2023 earnings over the past 60 days to $6.46 per share. This company surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 20.7%.
Price and Consensus: SSD
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 #2 stock, has gained 13.6% over the past year. URI has seen an upward estimate revision of 0.6% for 2023 earnings over the past 30 days to $41.92 per share. The company’s earnings for 2023 are expected to increase 29%.
Price and Consensus: URI
Otis: Based in Farmington, CT, Otis is one of the leading elevator and escalator manufacturing, installation and service companies. Otis’ primary focus on innovation is core to its strategy. The company connects global R&D efforts through an operating model that sets global and local priorities based on customer and segment needs. Its focus is on innovation and expansion of the digital ecosystem, and a suite of digital solutions for both existing service portfolio customers and new equipment shipments from factories.
OTIS, a Zacks Rank #2 stock, has gained 12% over the past year. This company surpassed earnings estimates in all of the trailing four quarters, with the average surprise being 4.6%. The company’s earnings for 2023 are expected to increase 8.2%.
Price and Consensus: OTIS