Shares of NCI Building Systems, Inc (NCS - Free Report) have gained about 24% in the past three months compared with the industry’s rise of 14.4%. The upside justifies the stock's Momentum Score of B. Focus on growing Insulated Metal Panels or IMP segment, investments in automation and process innovation, and favorable seasonal factors bode well for the company.
Also, earnings estimates have moved up in the past few weeks, which indicate that sentiments on NCI Building are treading in the right direction. Over the past 60 days, the Zacks Consensus Estimate for current-year earnings rose 5.4% to $1.37. Also, earnings estimates for the next year have inched up 1.2%. This positive trend reflects analysts’ bullish sentiments. Also, the company’s Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.
Moreover, the company’s trailing 12-month return on equity (ROE) supports its growth potential. Its ROE in the trailing 12 months is 23.5%, which is above the industry’s average of 12%. This reflects the company’s efficient usage of shareholders’ funds.
Let’s delve into the factors that will continue to propel NCI Building upward in the near future.
NCI Building to Grow on Bookings and Backlog Strength
Solid bookings and backlog aid NCI Building’s growth prospects. Notably, consolidated backlog advanced 11% year over year to $632 million at the end of the fiscal second quarter. The company also expects its fiscal 2018 performance to be supported by bookings, backlog strength as well as encouraging economic indicators. Based on key leading indicators and incoming order rates across its businesses, the company expects that combined Buildings and Components businesses will witness 2-4% volume growth for the addressable portion of low-rise starts for fiscal 2018.
NCI Building is well poised for long-term growth on the back of rising demand for key products and strategic actions. The company is focused on investments in automation and process innovation which will slash operating costs, improve margins, quality as well as service and enhance long-term operational flexibility.
It will also focus on consistent improvement in manufacturing and delivering further cost reductions with the Lean and Six Sigma initiatives across the entire business. The initiative will reduce excess operational back-office costs and simplify the business. Finally, NCI Building’s focus on growth strategy around IMP and its ability to drive adjacent products across the engines of legacy distribution channels will support the company’s performance. The impact of these three elements by 2020 will be $40-$50 million, yielding margin and EBITDA expansion as well as a reduction in overall expenses.
Valuation Looks Rational
NCI Building has a Value Style Score of A, putting it into the top 20% of all stocks we cover from this perspective. This combined with a Growth Score of A makes us reasonably confident that though the company is currently trading at a discount, it has ample opportunities in the near future. The company currently has a forward P/E ratio (price compared with this year’s earnings) of 16 compared with the industry’s 18.5. This indicates that a more value-oriented path is ahead for NCI Building compared to its peers as well.
Construction Market Outlook Positive
Demand for NCI Building’s products is largely related to the performance of the broader construction market. According to Dodge Data & Analytics, total U.S. construction starts for calendar-year 2018 will be up 3% to $765 billion. Further, the domestic economy is anticipated to witness moderate job growth and long-term interest rates may see some upward movement. For 2018, residential building is expected to rise 4%, non-residential building will improve 2% while non-building construction is expected to stabilize after two years of decline. Considering that NCI Building is one of North America’s largest integrated manufacturers and marketers of metal products for the non-residential construction industry, it is poised to gain from expected growth.
The Zacks Construction sector has a decent industry rank (among the top 38% out of 265 industries) which again signals that companies in this space are likely to benefit from favorable broader factors in the immediate future.
Other Stocks to Consider
A few other top-ranked stocks in the same sector are Installed Building Products, Inc (IBP - Free Report) , PGT, Inc (PGTI - Free Report) and Patrick Industries, Inc (PATK - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Installed Building Products, PGT and Patrick Industries have a long-term earnings growth rate of 30%, 19.3% and 12.7%, respectively.
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