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 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.
Prominent stocks in this industry are United Rentals, Inc. (URI - Free Report) and Masco Corporation (MAS - Free Report) .
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 in recent times, supported by a steady increase in outlays on private residential and government projects. Precisely, strong demand stemming from an improved residential construction market has been a boon for the industry participants.
- As the industry’s prospects are highly correlated to U.S. housing market conditions, and repair and remodeling activity, the improved housing market fundamentals are expected to provide a major boost to the industry participants’ profitability. As home sales tend to spur spending for building products, the latest acceleration in home sales could drive demand. The U.S. housing market is likely to continue benefiting from higher demand of new homes courtesy of lower mortgage rates, solid economic growth and favorable demographics. Meanwhile, the industry participants are increasingly focusing on pricing of products to offset higher input expenses. Cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions are supporting bottom-line growth. The companies are also following a systematic acquisition strategy to enhance domestic and international portfolios.
- However, the lingering trade conflict between the United States and China is taking a toll on U.S. business activities and hence margins. Rising labor costs are also compressing margins further.
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 #73, which places it at the top 29% 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 upbeat 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 top 50% 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 gaining confidence in this group’s earnings growth potential. Since November 2019, the industry’s earnings estimate for 2020 has gone up by approximately 1.1%.
Given the solid near-term prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms Sector & S&P 500
The Zacks Building Products – Miscellaneous industry has outperformed the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.
Over this period, the industry has gained 38% compared with the S&P 500’s increase of 25% and the broader sector’s 34.4% growth.
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 14X versus the S&P 500’s 19X and the sector’s 15.8X.
Over the past five years, the industry has traded as high as 17.9X, as low as 7.2X and at the median of 14X, 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 is expected to drive the industry. Also, investing in new products, support services and advanced manufacturing capabilities should boost revenues. Meanwhile, solid housing market fundamentals are added catalysts. However, the U.S.-China trade spat is likely to impact the companies’ margins as well as volumes. In order to mitigate tariff-related woes, higher pricing may have a temporary impact on volume.
Below we present five stocks from the Zacks Building Products - Miscellaneous space that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Arcosa, Inc. (ACA - Free Report) : This Dallas, TX-based manufacturer of infrastructure-related products and services currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its 2020 earnings has gone up 2.4% over the past 60 days. Earnings for 2020 are expected to increase 14.5%.
Price & Consensus: ACA
TopBuild Corp. (BLD - Free Report) : Headquartered in Daytona Beach, FL, TopBuild Corp. is an installer and distributor of insulation and other building products to the U.S. construction industry. It currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2020 earnings has gone up 4% over the past 60 days. Earnings for 2020 are expected to increase 15.7%.
Price & Consensus: BLD
Installed Building Products, Inc. (IBP - Free Report) : Headquartered in Columbus, OH, this company operates as a residential insulation installer in the United States. The stock carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2020 earnings has gone up 7.2% over the past 60 days. Earnings for fiscal 2020 are expected to increase 14.5%.
Price & Consensus: IBP
Patrick Industries, Inc. (PATK - Free Report) : Based in Elkhart, IN, this company is a major manufacturer of component products and distributor of building products and materials for the Recreational Vehicle, Manufactured Housing and Marine industries. The stock carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2020 earnings has gone up 1.6% over the past 30 days. Earnings for 2020 are expected to increase 16.7%.
Price & Consensus: PATK
Armstrong World Industries, Inc. (AWI - Free Report) : This Pennsylvania-based company is a leading global producer of ceiling systems for use primarily in the construction and renovation of commercial, institutional and residential buildings. The stock carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2020 earnings has gone up 0.2% over the past 30 days. Earnings for 2020 are expected to increase 12.3%.
Price & Consensus: AWI