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Gibraltar (ROCK) Up 23% in 3 Months: What's Behind the Rally?

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Gibraltar Industries Inc. (ROCK - Free Report) stock has gained 22.6% in the past three months compared with the Zacks Building Products - Miscellaneous industry’s 8.8% growth and the Zacks Construction sector’s 6.5% rally.

The company is well poised to benefit from its solid Three-Pillar growth strategy and robust Residential Products segment’s performance. Also, the U.S. administration’s endeavors to boost renewable energy and the infrastructure of the country.

Impressively, the Zacks Consensus Estimate for 2022 and 2023 earnings of $3.30 and $3.62 per share indicates 18.7% and 9.72% year-over-year growth, respectively. The solid price performance and analysts’ optimistic view are a testimony to the fact that Gibraltar has great growth potential in the long run.

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However, material and labor-supply-related challenges, delays and disrupted solar project schedules due to panel supply issues and unfavorable product mix are major headwinds.

Major Driving Factors

Strong Renewable Prospects: The company remains encouraged by the long-term market prospects of the renewable energy business. U.S. solar growth has remained undeterred by the solar panel tariffs.

The renewable’s revenues decreased in the last two quarters and the second quarter backlog declined by 2% due to ongoing industry panel supply issues, subsequent field project inefficiencies and additional structural steel inflation. Nevertheless, the industry remains positive about the U.S. Department of Commerce's preliminary decision and getting through the Uyghur Forced Labor Prevention Act or UFLPA learning curve.

Solid Residential Business: The company’s Residential products business has been performing pretty well in the last few quarters. Second quarter net sales saw a 5.3% increase, which was driven by the Residential segment, driven by a 13% increase in pricing to customers. Residential segment net sales increased 21.9%, marking the eighth consecutive quarter of double-digit growth. Segment’s adjusted operating and EBITDA margins grew 190 and 150 basis points, respectively, on favorable price/cost management, supply chain initiatives, labor management, volume leverage and 80/20 initiatives.

The segment’s 80% to 90% business banks on existing home repair, either due to the home aging or weather damage. Historically, home repairs have not seen a significant impact from changing interest rates, repairs.

Thee-Pillar Strategy: Gibraltar is progressing well, operationally and financially, on the back of its three-pillar growth strategy. The strategy is focused on three core tenets - Business Systems, Portfolio Management and Organizational Development. The first pillar, i.e., Business Systems combines two of its previous strategic pillars, namely, operational excellence and product innovation. The second strategic pillar comprises Portfolio Management and Acquisitions. Through this pillar, the company is focused on optimizing its business portfolio. During 2021, the company’s 30% revenue growth was mainly attributable to 21% contributions from acquisitions. Lastly, the third pillar of the strategy is Organizational Development. The Organizational Development primarily focuses on talent development, design and structure of the organization.

Hurdles to Cross

Inflation & Supply Woes: There are three core materials that ROCK uses across the company, which include steel, aluminum and resin. The company experienced mixed scenarios for these materials. According to the company, average steel prices are expected to rise during the end of third-quarter 2022 and then start to level off and/or decline (as per the April report from IHS Markit). Meanwhile, Aluminum prices are expected to rise at least through Q3. It remained high throughout the year due to the Russia/Ukraine conflict and Russia's role in the global aluminum supply chain.

During the first half of 2022, the company continued to witness higher costs related to labor and material. Also, the company had to face challenges regarding the supply of raw materials as well as logistic management. In the second quarter, the company continued to witness delays and disrupted solar project schedules. Its Renewables, Agtech and infrastructure’s revenue decreased 5.8%, 18.6% and 5.3% year over year, respectively. The company is still dealing with panel supply issues for the U.S. solar industry, as 80% of the key materials and components for panels are produced in China. The company expects these issues to continue in rest of 2022.

Zacks Rank

ROCK currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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