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Earnings Preview: NCI Building

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NCI Building Systems, Inc. (NCS - Free Report) is slated to report its third-quarter fiscal 2012 results on September 5, 2012. The Zacks Consensus Estimate for the quarter is pegged at a loss of 5 cents per share, representing an improvement from the last-year quarter’s loss of 38 cents and 45 cents in the previous quarter. The Zacks Consensus Estimate for revenue currently stands at $308 million, estimating an annual growth of 18%.
Second Quarter Synopsis
The company reported adjusted loss of 45 cents per share in the second quarter (ended April 29, 2012), much wider than the Zacks Consensus Estimate of a loss of 39 cents but slightly narrower than the year-ago quarter’s loss of 48 cents.
Revenues in the reported quarter increased 11% year over year to $250.2 million, comfortably surpassing the Zacks Consensus Estimate of $243 million. This outperformance was aided by better performance of the Coatings and buildings segment, favorable business mix and development in the manufacturing, engineering and supply chain operations. 
Estimate Revision Trend
Of the two analysts covering the stock, none revised their estimates for the third quarter in the last 7 days or in the last 30 days. Similarly, no estimate revision was witnessed for fiscal 2012 over the past 7 days as well as 30 days. The lack of estimate revisions indicates the absence of any major catalyst driving the quarterly results.
The Zacks Consensus Estimates remained unchanged for both the third quarter and fiscal 2012 over the last 90 days.  
Earnings Surprise History
With respect to earnings surprise, NCI Building has topped the Zacks Consensus Estimate in three of the last four quarters. The company delivered an average positive earnings surprise of 24.07% over the preceding four quarters, implying that it has beaten the Zacks Consensus Estimate by the same measure.
Our Take
NCI Building Systems has recently acquired Metl-Span LLC for $145 million. Metl-Span is a leader in the advancement of insulated panel technology and serves the architectural, commercial, industrial and cold Storage industries (non-residential building products market) with energy efficient and cost effective insulated metal wall and roof panels. The acquisition will position NCI Building as a leader in the insulated metal panel business by diversifying and expanding its existing product range. In addition, NCI Building will also be benefited from a growing customer base as well as distribution network in North America. The company expects the acquisition to be accretive to its earnings in fiscal 2012.
During the second quarter, bookings increased 39% over second quarter 2011, and backlog reached $259 million, up 16% sequentially and 23% year over year. Both indicate toward a better second half performance  
NCI Building Systems has expanded its product portfolio in the Coating segment to industries outside the non-residential construction market and has been providing competent services to a wider customer base. It has plans to increase toll and package sales of the coating segment. This initiative will reduce the dependence of the coating segment on the weaker construction market.
The slow recovery in non-residential construction market remains a concern for NCI Building Systems. The company has incurred losses for ten straight quarters.
According to the American Institute of Architects, the architecture billings index, a predictor of construction spending 9 to 12 months in the future, was 45.8 in May, followed by 45.9 in June and 48.7 in July. Any score above 50 indicates an increase in billings. After remaining at a level of over 50 for the five consecutive months till March, the index has slipped into negative territory. The more relevant commercial and industrial component of the Index was at 46.9 in July and 48.4 in July. This is also deterioration from 50.7 in May and 53.8 in April. 
On a positive note, the non-residential construction forecast of the McGraw-Hill Constructions has predicted construction activity to increase in 2012 from the 2011 level. It expects 2012 non-residential construction activity measured in square feet to be 2% higher than 2011. It projects square footage at 690 million in 2012 increasing from the previous year’s 678 million. The ramp up in the non-residential construction market will benefit NCI Building by driving demand for its products.
Furthermore, one of the important raw materials for NCI Buildings is steel. It depends heavily on steel and thus its business is considerably influenced by steel prices. The steel industry is cyclical in nature and steel prices remained highly volatile in recent years. The prices may remain volatile in future causing margin headwinds.
Currently, the stock retains a Zacks #3 Rank, implying a short-term Hold rating. Our long-term recommendation on NCI Building remains Neutral.
Based in Texas, NCI Building Systems is one of the largest integrated manufacturers of metal products for the North American non-residential construction industry. It competes with privately held companies like American Buildings Company, Butler Manufacturing Company and Varco Pruden Buildings.

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