James Hardie Industries Up on Strong Q3 Earnings

Shares of James Hardie Industries plc (JHX) gained around 3.7% after the company reported strong results for third-quarter fiscal 2014 (ended Dec 31, 2013). Adjusted earnings improved 67% to 10 cents per share from the prior-year quarter figure of 6 cents. However, results lagged the Zacks Consensus Estimate of 48 cents. However, results lagged the Zacks Consensus Estimate of 48 cents.

On a reported basis, earnings increased three-fold to 21 cents per share from 7 cents in the year-ago quarter. Earnings in the reported quarter included asbestos, asset impairments, Australian Securities and Investments Commission (ASIC) expenses, New Zealand product liability and tax adjustments.

Operational Updates

Revenues in the reported quarter increased 10% year over year to $353 million. However, results fell short of the Zacks Consensus Estimate of $394 million. The growth was mainly driven by enhanced sales volume and higher sales price in the USA and Europe Fibre Cement segments. The segments were aided by improved activity in the new construction as well as the repair and remodel markets and the execution of company’s pricing strategies.

Cost of sales rose 3.3% to $231.7 million from $224 million in the year-ago quarter. Gross profit improved 26% year over year to $121.5 million. Consequently, gross margin expanded 440 basis points (bps) to 34.4% year over year.

Selling, general and administrative expenses, excluding New Zealand product liability adjustment, decreased 9.9% year over year to $53.8 million. Adjusted operating income (excluding asbestos, ASIC expenses and New Zealand product liability) increased to $55.2 million from $34.7 million in the prior-year quarter. Operating margin was 15.6%, a 480 bps expansion from the year-ago quarter.

Financial Update

Cash flow from operating activities for the nine-month period ended Dec 31, 2013 increased to $254.7 million from $83.3 million in the prior-year comparable period, driven by amended tax assessment, decrease in contribution to Asbestos Injuries Compensation Fund Ltd. (:AICF) and higher earnings.

For the nine-month period ended Dec 31, 2013, net capital expenditures climbed to $67.9 million from $41.3 million in the prior year. The increase was primarily due to purchase of previously-leased land and buildings located at the Carole Park and Brisbane plant as well as refurbishment of idled manufacturing assets at the California plant.

On Nov 2013, James Hardie Industries announced a dividend of 8 cents per share (fiscal 2014 first-half dividend) compared with 5 cents in the year-ago comparable period. The dividend has paid on 28 Mar 2014, with a record date as of 19 Dec 2013. In addition, the company declared a special dividend of 28 cents per share. The 125-year anniversary special dividend will be paid on 30 May 2014 to shareholders of record on 21 Mar 2014.

In May 2013, James Hardie Industries announced a new share buyback program to acquire up to 5% of its issued capital. During the quarter, the company repurchased and cancelled 305,153 shares for $3.5 million, at an average market price of $11.60.

Outlook

James Hardie Industries will benefit from the expected recovery in the U.S. housing market. According to the U.S. Census Bureau, the single family building permits were 482,600 for the nine months ended 31 Dec 2013, an increase of 18% from the year-ago comparable period.

James Hardie Industries forecasts earnings before interest and tax (:EBIT) margin for full-year 2014 to be above 20% in the U.S.A and Europe Fibre Cement segment, led by improvement in the underlying market demand and financial performance. However, uncertainty in the U.S. operating environment will adversely impact the margin.

The operating environment in Australia will improve modestly. However, the New Zealand business is expected to deliver improved results on the back of a stronger local housing market, particularly in Auckland and Christchurch.

Based in Dublin, Ireland, James Hardie Industries manufactures fiber cement products and systems for internal and external building construction applications in the United States, Australia, New Zealand and the Philippines. These products are used in a number of markets, including new residential construction, manufactured housing, repair and remodeling as well as a variety of commercial and industrial applications.

James Hardie Industries currently has a Zacks Rank #2 (Buy). Some better-ranked stocks in the sector include CaesarStone Sdot-Yam Ltd. (CSTE), USG Corporation (USG) and Wolseley plc (WOSYY). While CaesarStone sports a Zacks Rank #1 (Strong Buy), USG Corporation and Wolseley carry a Zacks Rank #2 (Buy).

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