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4 Building Materials Companies to Consider as Housing Market Outlook Improves

- By Sydnee Gatewood

Despite housing starts dropping in February, lower mortgage rates are giving the housing market a rosier outlook.

Reuters reported that the Commerce Department recorded an 8.7% decrease in housing starts to a seasonally adjusted annual rate of 1.162 million units, the largest percent decline in eight months as a result, in part, of bad weather. Construction of single-family homes tumbled to a one-and-a-half-year low. Building permits also fell 1.6% to a rate of 1.296 million units.


While homebuilders bear the brunt of the impact from changes in the housing market, the companies that provide the necessary materials for construction could be affected as well. As a result of an improving outlook for the industry, however, investors may find some value opportunities among companies in the building materials sector that are trading below Peter Lynch value.

Lynch, a legendary investor, developed this method as a way of simplifying his research process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often good investments since their share prices are likely to appreciate over time, creating value for shareholders. In addition, the GuruFocus All-in-One screener looked for companies that have business predictability ranks of at least one out of five stars.

The screener found the companies in this sector that met these criteria as of March 28 were Builders FirstSource Inc. (BLDR), Griffon Corp. (GFF), Louisiana-Pacific Corp. (LPX) and Owens Corning Inc. (OC).

Builders FirstSource

The Dallas-based company, which is the U.S.'s largest supplier of structural building products and value-added components, has a $1.53 billion market cap; its shares were trading around $13.30 on Thursday with a price-earnings ratio of 7.51, a price-book ratio of 2.60 and a price-sales ratio of 0.19.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.

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GuruFocus rated Builders FirstSource's financial strength 5 out of 10. While the company has poor interest coverage and has recorded a slowdown in revenue per share growth over the last 12 months, the Altman Z-Score of 3.70 indicates it is in good fiscal health.

The company's profitability and growth scored a 9 out of 10 rating. Although the operating margin is expanding, it still underperforms 68% of competitors. Regardless, the return on equity and return on capital are outperforming at least 77% of industry peers. Builders FirstSource is also supported by a perfect Piotroski F-Score of 9, which implies operations are healthy, and a one-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.

Of the gurus invested in Builders FirstSource, investment firm Ruane Cunniff (Trades, Portfolio) has the largest stake with 7.51% of outstanding shares. Jim Simons (Trades, Portfolio)' Renaissance Technologies, Arnold Schneider (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Hotchkis & Wiley and Paul Tudor Jones (Trades, Portfolio) are also shareholders.

Griffon

Headquartered in New York, the holding company, whose Ames and Clopay subsidiaries produce landscaping tools and garage doors, has a market cap of $878.66 million; its shares were trading around $18.79 on Thursday with a price-earnings ratio of 7.70, a price-book ratio of 1.85 and a price-sales ratio of 0.36.

According to the Peter Lynch chart, the stock is undervalued.

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Griffon's financial strength was rated 5 out of 10 by GuruFocus. As a result of issuing approximately $271.6 million in new long-term debt over the past three years and posting a loss in operating income, the company has poor interest coverage. In addition, the Altman Z-Score of 2.18 suggests it is under some fiscal pressure.

The company's profitability and growth fared a bit better, scoring a 7 out of 10 rating. On top of operating margin expansion, the company is supported by strong returns, a moderate Piotroski F-Score of 6, which indicates business conditions are stable, and consistent earnings and revenue growth. Griffon also has a 3.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.

With 11.55% of outstanding shares, Mario Gabelli (Trades, Portfolio) is the company's largest guru shareholder. Other gurus with positions in the stock are Royce, Jones and Simons' firm.

Louisiana-Pacific

The building materials manufacturer, which is based in Nashville, Tennessee, provides engineered wood products like siding, joists and trim. It has a $3.02 billion market cap; its shares were trading around $24.47 on Thursday with a price-earnings ratio of 9.03, a price-book ratio of 1.97 and a price-sales ratio of 1.26.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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Boosted by adequate interest coverage and a robust Altman Z-Score of 5.42, Louisiana-Pacific's financial strength was rated 8 out of 10 by GuruFocus.

The company's profitability and growth scored a 6 out of 10 rating, driven by strong margins and returns that outperform competitors, a moderate Piotroski F-Score of 5 and a one-star business predictability rank.

Simons' firm is the company's largest guru shareholder with 1.84% of outstanding shares. Other guru investors holding the stock are Gabelli, NWQ Managers (Trades, Portfolio), Royce, Greenblatt and Pioneer Investments (Trades, Portfolio).

Owens Corning

The Toledo, Ohio-based manufacturer of insulation, roofing and fiberglass composites has a market cap of $5.12 billion; its shares were trading around $46.75 on Thursday with a price-earnings ratio of 9.59, a price-book ratio of 1.19 and a price-sales ratio of 0.73.

The Peter Lynch chart suggests the stock is undervalued.

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GuruFocus rated Owens Corning's financial strength 5 out of 10. Despite issuing approximately $1.4 billion in new long-term debt over the last three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 1.94, however, indicates the company is under some minor financial stress.

The company's profitability and growth fared better, scoring a 7 out of 10 rating. In addition to strong margins and returns, Owens Corning is supported by a moderate Piotroski F-Score of 6, consistent earnings and revenue growth and a two-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 6% per year.

Of the gurus invested in Owens Corning, investment firm Barrow, Hanley, Mewhinney & Strauss has the largest position with 3.49% of outstanding shares. Other top guru shareholders include Pioneer, Chris Davis (Trades, Portfolio), Fisher, Simons' firm, Louis Moore Bacon (Trades, Portfolio), Greenblatt, PRIMECAP Management (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Royce.

Disclosure: No positions.

This article first appeared on GuruFocus.