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NCI Building Downgraded to Strong Sell

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On Sep 28, Zacks Investment Research downgraded NCI Building Systems Inc. (NCS - Free Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Both share prices and earnings estimates have undergone sharp downward revisions following its disappointing third quarter fiscal 2013 results, released on Sep 4. NCI Building’s third quarter earnings slumped 60% to 2 cents per share, way behind the Zacks Consensus Estimate of 12 cents per share. This manufacturer of metal products for the North American non-residential construction industry has delivered negative earnings surprises in 3 out of the past 4 quarters.

Total revenue improved 6% to $317 million in the quarter, but failed to meet the Zacks Consensus Estimate of $348 million. Despite a rise in revenues, margins weakened considerably. Gross margin contracted 90 basis points to 21.1% while operating margin plunged 200 basis points to 1.3% in the quarter. This was due to lower-than-anticipated volumes, pricing pressure, and increased manufacturing costs due to ongoing investments in strategic initiatives as well as ramp-up costs at its Middletown, Ohio coating and Mattoon, Ill., insulated metal panel facilities.

The construction market in the third quarter was affected by the sluggishness in the broader economy. In the quarter, low-rise nonresidential construction starts (measured in square feet) dipped 10.7% from the prior-year quarter. Thus, the company believes that the market is unlikely to recover sufficiently to deliver annual growth in volumes.

Thus, given the weak results and a tepid outlook, the Zacks Consensus Estimate for fiscal 2013 has nosedived 322% to a loss per share of 40 cents a share in the past 30 days, while that for fiscal 2014 went down 43% over the last 30 days to 33 cents.

Other Stocks to Consider

Not all stocks are performing as poorly as NCI Building Systems. Building and machinery-construction stocks worth considering include CaesarStone Sdot-Yam Ltd. (CSTE - Free Report) and PGT, Inc. (PGTI - Free Report) , both with a Zacks Rank #1 (Strong Buy), and Masco Corporation (MAS - Free Report) , which retains a Zacks Rank #2 (Buy).

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