NCI Building Systems (NCS - Free Report) has been witnessing higher raw material, freight and labor costs of late. Despite being one of the largest integrated manufacturers and marketers of metal products in North America, its shares have declined 61.6% in a year’s time compared with the industry’s fall of 32.4%. Also, earnings estimates for 2018 have moved 28.7% south over the past 30 days, limiting the stock’s growth potential.
Let’s delve deeper and try to identify the factors affecting this Zacks Rank #5 (Strong Sell) company’s growth potential.
Dismal Fourth-Quarter Performance & Tepid ‘19 View: During the fourth quarter of fiscal 2018, the company’s earnings missed the Zacks Consensus Estimate by 1.8%. The poor performance was mainly due to lower manufacturing utilization owing to bad weather, primarily in the Metal Components segment, and product mix in the IMP segment.
Moreover, the company’s overall performance in fiscal 2019 is likely to be affected by increasing input costs, adverse weather conditions and slowing market trends. In the commercial segment, it projects low-rise starts growth in mid-single digits, with the addressable markets expected to grow in low-single digits. Revenue growth in repair and remodeling business, which accounts for approximately one third of the total business, will be slowed down to mid-single digits during the said fiscal year.
Meanwhile, the Zacks Consensus Estimate for the current year is pegged at $1.34, which reflects a decline of 7.6% from the prior-year figure of $1.45 per share.
Rising Raw Material & Labor Cost: Despite executing various cost-saving initiatives, raw material and labor cost inflation has been negatively impacting the margins of the company. Due to rising steel prices, customers are fearing future price increase and taking delivery immediately. The trend is expected to continue in fiscal 2019 as well, which will impede activity levels in the forthcoming quarter.
Additionally, continuous freight and labor cost pressure are denting its performance. In the fiscal fourth quarter, cost of sales rose 18.2% while gross margin contracted 60 basis points to 23.2%.
Softness in Metal Component Business: NCI Building is witnessing lower Metal Components volumes due to extreme wet weather, specifically in Texas and Southeast to the business segment. Dismal Metal Components business performance also impacted the company’s overall gross margin. In the fiscal fourth quarter, gross margin was 23.2%, which came in at the lower end of the company’s guided range. Meanwhile, its adjusted operating profit declined 14.9% year over year. The weather disruption is likely to affect the company’s margins in the near future.
Stocks to Consider
Some better-ranked stocks in the Zacks Construction sector include KBR, Inc. (KBR - Free Report) , United Rentals, Inc. (URI - Free Report) and PGT Innovations, Inc. (PGTI - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
KBR surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with the average being 9.2%
United Rentals has an expected earnings growth rate of 39.2% for the fourth quarter of 2018.
PGT Innovations has a projected earnings growth rate of 44.4% for the current quarter.
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