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4 Retail Building Products Stocks to Watch Amid Soft Industry Trends

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The Zacks Building Products – Retail industry has been witnessing broad-based pressure across the business, driven by softened consumer demand versus expectations, which is likely to impact the performances of the industry participants. Severe constraints related to inflation, a deflation in lumber prices, and product and transportation cost inflation are worrisome.

However, the participants are likely to benefit from technology initiatives to bolster the e-commerce experience. Companies have been strengthening digital ecosystems, providing the best online assortments and bolstering omni-channel capabilities. Companies are also benefiting from accretive acquisitions, the focus on expanding supply-chain facilities and digital initiatives. Continued innovation, e-commerce expansion and strong demand are likely to benefit players like The Home Depot Inc. (HD - Free Report) , Fastenal Company (FAST - Free Report) , Builders FirstSource, Inc. (BLDR - Free Report) and Beacon Roofing Supply (BECN - Free Report) .

About the Industry

The Zacks Building Products – Retail industry mainly comprises U.S. home improvement retailers, manufacturers of industrial and construction materials, and distributors of wallboard and ceiling systems. Some industry participants offer products and services for home decoration, repair and remodeling, and in-home delivery and installation services. A few industry players provide construction 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, and lawn and garden decor products. Some players deal in threaded fastener products, and manufactured and natural stone tiles. In addition to general consumers, the industry players cater to professional builders, sub-contractors, remodelers and retailers.

3 Trends Shaping the Future of Building Products - Retail Industry

Elevated Costs: Inflationary pressures, particularly higher input costs, have been concerning for players in the home improvement industry. Such increased input costs are likely to put pressure on margins. A deflation in lumber prices is also expected to hurt the performance of participating companies. Some companies have provided conservative views for 2023 based on assumptions about lower consumer spending trends, normalized transactions and continued investments to capture market share. Many economists have projected flat real economic growth and consumer spending for 2023. The industry is expected to witness a gradual normalization in transactions as consumer spending has shifted from goods to services.

Do-it-Yourself (DIY) and Pro Projects: Despite a slowdown in the spending trends, the demand for revamping interiors and repair-remodel represent opportunities for in the industry players. DIY projects for decorating and maintaining furniture and fixtures are being widely undertaken. Additionally, consumers are open to hiring professionals (“Pros”) to complete their home renovations, resulting in rising demand for Pro projects. Companies noted that Pro backlogs continue to be healthy and elevated. This is likely to aid companies in the home improvement space, with a focus on building Pro offerings.

Digitization & Acquisitions in Focus: Retail Building Products industry participants have been witnessing a surge in online business transactions, owing to consumers’ growing digital dependency. The focus on virtual platforms to boost customer engagement has been rewarding for top-line growth of many industry players. Companies have, therefore, been strengthening their digital presence by expanding the availability of online assortments and bolstering omni-channel capabilities. Such prudent measures have been aiding industry participants to meet the accelerated demand. Companies are also ramping up their delivery operations to provide safe and swift services. The digital transaction boom should continue to drive the top lines of the key industry players. Acquisitions have been crucial parts of growth strategies of companies in the Retail Building Products industry. Some Players have been focusing on exploring acquisition options to expand extensively across vast geographic boundaries and improve organic revenues.

Zacks Industry Rank Indicates Dull Prospects

The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 18% 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 dull 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 50% of the Zacks-ranked industries is a result of a 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.

Before we present a few stocks that you may want to consider for your portfolio, let’s look at the industry’s recent stock-market performance and the valuation picture.

Industry Vs. Broader Market

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

The industry has risen 2.8% in the past year compared with the broader sector’s growth of 14.6% and the S&P 500’s rally of 15.2%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is the commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 18.52X compared with the S&P 500’s 19.31X. Further, the sector’s forward-12-month P/E stands at 21.59X.

Over the last five years, the industry traded as high as 23.43X and as low as 14.25X, with the median being 18.87X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Building Products Stocks to Watch

Beacon Roofing: The Herndon, VA-based company is the largest publicly traded distributor of residential and non-residential roofing materials and complementary building products in the United States and Canada. It has been gaining from several strategic initiatives undertaken to drive its long-term ambition of growing and enhancing customer experience; expanding the top line and the margin; and boosting value for customers, suppliers, employees and shareholders. The company is currently focused on its Ambition 2025 targets (announced on Feb 24, 2022), which emphasize operational excellence, above-market growth trajectory and accelerated stockholder value creation. Beacon Roofing remains focused on four key strategic initiatives — organic growth, digital, OTC (On-Time and Complete) and branch operating performance — which have been boosting sales and helping improve operating profitability.

The company is focused on improving sales and the operating performance at exterior and interior branches, and intends to enhance the overall customer experience with increased scope and scale of business. Shares of the Zacks Rank #2 (Buy) company have rallied 37.2% in a year. The Zacks Consensus Estimate for its current fiscal year’s sales and earnings indicates growth of 7.2% and 8.9%, respectively, from the year-ago quarter’s actuals. The consensus estimate for current fiscal-year earnings has moved up 0.8% in the past seven days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: BECN

Home Depot: The Atlanta, GA-based company is the world’s largest home improvement specialty retailer, based on net sales. Home Depot has been benefiting from ongoing investments. Continued strength in the Pro and DIY categories, and its digital momentum have been the key drivers. The company’s interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters, aiding digital sales.

Home Depot is witnessing significant benefits from the execution of its One Home Depot plan, which focuses on supply-chain expansion, technology investments and digital enhancements. The company has created the fastest, most efficient delivery network in home improvement through options like buy online pick up in store, buy online deliver from store and curbside pickup. The Zacks Rank #3 (Hold) company has declined 0.5% in a year. The Zacks Consensus Estimate for HD’s current fiscal-year sales and earnings indicates year-over-year declines of 3.2% and 9.8%, respectively. The consensus estimate for current fiscal-year earnings has moved down 2% in the past 30 days.

Price and Consensus: HD

Fastenal: The Winona, MN-based wholesale distributor of industrial and construction products has been benefiting from strong demand for manufacturing and construction equipment, as well as supplies. The company’s focus on virtual platforms to boost customer engagement is improving sales and driving growth. Cost-control strategies like automating warehouses, increasing delivery efficiency through its trucking network and selling more private-level products with higher margins are aiding FAST to improve efficiency, thereby increasing returns.

Industrial vending is one of the primary growth drivers for Fastenal, and has the potential to significantly increase sales and profits. The Zacks Rank #3 company is striving to boost its onsite location portfolio, in which a mini-Fastenal shop is located in a customer’s facility. The FAST stock has risen 26.3% in a year. The Zacks Consensus Estimate for the company’s current fiscal-year sales and earnings indicates year-over-year growth of 5.1% and 5.8%, respectively. The consensus estimate for current fiscal-year earnings has been unchanged in the past 30 days.

Price and Consensus: FAST

Builders FirstSource: The Dallas, TX-based company manufactures and supplies building materials. The company has been benefiting from its focus on cost synergies, strategic acquisition, and robust demand from solid housing and repair and remodeling activities. Robust demand for single-family housing, R&R and other activities have been tailwinds for BLDR’s products and services. Builders FirstSource continues to focus on investing in innovations and enhancing digital solutions for its customers.

Acquisitions are important for BLDR’s growth strategy to supplement its organic growth and expand extensively across vast geographic boundaries. The Zacks Rank #3 company has been active on the acquisition front, which is supporting its top line. It is also focusing on cost-management practices. The BLDR stock has risen 121% in a year. The Zacks Consensus Estimate for the company’s current fiscal-year sales and earnings indicates declines of 25.6% and 26.1%, respectively, from the prior-year period’s reported figures. The consensus estimate for current fiscal-year earnings has moved up 0.7% in the past 30 days.

Price and Consensus: BLDR

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