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Retail Building Products Industry's Prospects Appear Bright

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The  Building Products – Retail industry covers a wide range of groups, including home improvement retailers, manufactures of industrial and construction materials, and distributors of wallboard and ceilings systems. Additionally, the industry comprises players offering products and services for home decor, repair and remodeling.

Some companies in this industry also offer materials, from cement or concrete foundation materials to roofing boards and shingles. The companies sell lumber, insulation materials, drywall, plumbing fixtures, flooring, lawn and garden, and decor products. Some players also deal in threaded fastener products as well as manufactured and natural stone tiles. The industry players mainly sell products to professional homebuilders, sub-contractors, remodelers and consumers.

Let’s have a look at the industry’s three major themes:

•    The building products industry is focusing on digitalization. We note that the constituent companies are ramping up their omni-channel capabilities with well-chalked out strategies to connect offline and online channels. They are also looking at inventory rationalization and elimination of underperforming stock-keeping units among other initiatives to bolster growth. Moreover, they are making investments toward enhancing supply chain system as well as delivery and fulfillment facilities. The companies are expected to benefit from the aforementioned initiatives and technological advancements.

•    Despite the slowdown in the housing market due to lack of affordable homes, skilled labor shortages and a dearth of residential lots, a sound overall economic scenario might act in favor of the companies in this industry. Additionally, demand for new houses, backed by lower mortgage rates and home prices will result in higher sales and boost profitability. Per the Commerce Department, new home sales rose 4.5% to a seasonally adjusted yearly rate of 692,000 units in March. This marks the highest level since November 2017 and was the third consecutive month of increase.

•    Conversely, higher spending toward technological advancements and fulfilment centers may strain margins of many players in the Building Products – Retail space. Stiff competition coupled with higher selling, general and administrative expenses and unfavorable customer/product mix are dampening margins. Rise in commodity or raw material costs, supply chain and transportation expenses are added headwinds.

Zacks Industry Rank Indicates Encouraging Prospects

The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. It carries a Zacks Industry Rank #100, which places it in the top 40% 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 solid 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

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 Outperforms Sector & Broader Market

The Zacks Building Products – Retail Industry has outperformed the broader Retail-Wholesale Sector as well as the S&P 500 Index over the past year.

One-Year Price Performance

While the stocks in this industry have collectively gained 13.5%, the Zacks S&P 500 composite and Zacks Retail-Wholesale Sector have advanced 9.6% and 9.3%, respectively.

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 18.48X compared with the S&P 500’s 17.21X and the sector’s 24.74X.

Over the last five years, the industry has traded as high as 21.61X, as low as 16.01X and at the median of 18.91X, as the chart below shows.

Price-to-Earnings Ratio

Bottom Line

Strength in omni-channel capabilities, improving economic backdrop along with higher demand for homes are likely to drive the momentum of the Building Products – Retail industry. Additionally, an impressive Zacks Rank and industry’s performance raise confidence and highlight its solid growth prospects. However, higher cost of investments coupled with raw material cost inflation and intense competition in the industry might result in a slowdown.

We have one stock with a Zacks Rank #1 (Strong Buy) in the Zacks Building Products – Retail space. Additionally, we suggest three stocks with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

BMC Stock Holdings, Inc. (BMCH - Free Report) : This Raleigh, NC-based distributor of lumber and building materials has gained 15.6% in the past year. The Zacks Consensus Estimate for the current fiscal was revised 3.4% upward in the last 30 days. Further, the stock sports a Zacks Rank of 1.

Price and Consensus: BMCH

Fastenal Company (FAST - Free Report) : This Winona, MN-based wholesale distributor of industrial and construction products has rallied 32.5% in a year. The Zacks Consensus Estimate for the current fiscal was revised 0.4% upward in the last seven days. Further, the stock has a Zacks Rank of 3.

Price and Consensus: FAST

Builders FirstSource, Inc. (BLDR - Free Report) : This manufacturer and supplier of building materials and construction services is also a Zacks Ranked #3 stock. Shares of the company have advanced 54.1% year to date. Moreover, the Zacks Consensus Estimate for current-year EPS moved up 1.3% in the last 60 days.

Price and Consensus: BLDR

Tecnoglass Inc. (TGLS - Free Report) : This manufacturer and seller of architectural glass, windows and related aluminum products is also a Zacks Ranked #3 stock. Shares of the company have advanced 3.4% in a year. Moreover, the Zacks Consensus Estimate for current-year EPS moved up 2.7% in the last 30 days.

Price and Consensus: TGLS

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