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High Costs Mar Building Products - Retail Industry Prospects

Zacks Equity Research

The Building Products – Retail industry comprises of U.S. home improvement retailers, manufactures of industrial and construction materials and distributors of wallboard and ceilings systems. Some of the industry participants also offer products and services for home decoration, repair and remodeling, and in-home delivery and installation services.

The industry players provide a wide array of products ranging from cement or concrete foundation materials to roofing boards and shingles. The companies also sell lumber, insulation materials, drywall, plumbing fixtures, hard-surface flooring, lawn and garden, and decor products. Some players also deal in threaded fastener products, and manufactured and natural stone tiles. The industry players cater to professional homebuilders, sub-contractors, remodelers and consumers.

Let’s have a look at the industry’s three major themes:

  • Sentiments regarding the U.S. housing market are mixed at the moment. Despite low mortgage rates, buyers remain cautious regarding the long-term commitment of house purchases. Per sources, consumer sentiment in housing improved in August, however, buyers remain apprehensive on global economic uncertainties. Lack of affordable homes, skilled labor shortages, lower inventory and dearth of residential lots are also likely to act as headwinds.
  • Increasing supply chain costs and escalating operating expenses are weighing on the companies’ margins, despite higher product prices and solid cost-control measures. Unfavorable product mix and adverse sales mix are putting further pressure on margins. We note that the housing and real estate markets are not immune to the tariff-related woes. In fact, leading retailer of hard-surface flooring and related accessories, Lumber Liquidators Holdings, Inc. (LL) anticipates a tepid performance due to tariff-related headwinds. Further, rise in commodity or raw material costs and transportation expenses and higher cost of investments toward technological advancements are likely to act as deterrents. Decline in lumber prices also remains a woe.
  • The building products industry is focusing on digitalization. The industry participants are resorting to well-planned strategies to connect offline and online channels including higher customer engagement and supply-chain access to bolster growth. Digital-savvy customers are increasingly resorting to online apps for home shopping. Further, retailers are embracing a completely integrated digital platform to cater to online purchases. We believe that the companies are well-poised to gain from efforts to provide an interconnected shopping experience, with innovative products. Apart from digitalization, leading home-improvement players, namely, The Home Depot, Inc. (HD) and Lowe's Companies, Inc. (LOW) are benefiting from initiatives to boost Pro customer sales. The Pro segment is benefiting from efforts to enhance service capabilities like tool rental, delivery and the new B2B website.

Zacks Industry Rank Indicates Dull Prospects

The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. It carries a Zacks Industry Rank #160, which places it at the bottom 37% of more than 250 Zacks industries.

The group’s Zacks Industry Rank which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. The industry’s earnings estimate for the current year declined about 4.5% over the course of a year.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outpaces in Terms of Shareholder Returns

The Zacks Building Products – Retail Industry has outperformed the broader Retail-Wholesale Sector as well as the S&P 500 index over the past year.

While the stocks in this industry have collectively gained 7.1%, the Zacks S&P 500 Composite has witnessed growth of 1.4%. Meanwhile, the Zacks Retail-Wholesale Sector declined 0.9%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, a commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 20.41X compared with the S&P 500’s 17.02X. Further, the sector’s forward-12-month P/E stands at 24.03X.

Over the last five years, the industry has traded as high as 21.63X and as low as 16.03X, with the median being at 19.20X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Improving economic backdrop and higher home prices might drive sustainable growth for the Building Products – Retail industry. Additionally, continuous efforts toward digitization and product innovation are likely to benefit the players. However, a conservative consumer approach stemming from global uncertainties and an unimpressive Zacks Industry Rank raises concerns.

Here we present one stock in the Zacks Building Products – Retail space that currently sports a Zacks Rank #1 (Strong Buy), while other two stocks carry a Zacks Rank #2 (Buy). Additionally, we suggest one stock with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at those chosen stocks:

BMC Stock Holdings, Inc. (BMCH): This Raleigh, NC-based distributor of lumber and building materials has jumped 66.2% year to date. The Zacks Consensus Estimate for earnings in the current fiscal year has been revised 8.5% upward in the last 60 days. Further, the stock has a Zacks Rank of 1.

Price and Consensus: BMCH

Builders FirstSource, Inc. (BLDR): This Dallas, TX-based supplier of building materials and manufactured components has soared 82.9% year to date. The Zacks Consensus Estimate for earnings in the current fiscal year has been revised 9% upward in the last seven days. Further, the stock has a Zacks Rank #2.

Price and Consensus: BLDR

GMS Inc. (GMS): The consensus estimate for earnings with regard to this distributor of wallboards and suspended ceilings systems has moved nearly 2% up for the current fiscal year in the last 30 days. This Zacks Rank #2 stock has skyrocketed 84.5% year to date.

Price and Consensus: GMS

Fastenal Company (FAST): This Winona, MN-based wholesale distributor of industrial and construction products has gained 28.5% year to date. The Zacks Consensus Estimate for earnings in the current fiscal year has been revised 0.4% upward in the last seven days. Further, the stock has a Zacks Rank of 3.

Price and Consensus: FAST

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Lowe's Companies, Inc. (LOW) : Free Stock Analysis Report
Lumber Liquidators Holdings, Inc (LL) : Free Stock Analysis Report
The Home Depot, Inc. (HD) : Free Stock Analysis Report
GMS Inc. (GMS) : Free Stock Analysis Report
Fastenal Company (FAST) : Free Stock Analysis Report
BMC Stock Holdings, Inc. (BMCH) : Free Stock Analysis Report
Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report
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