The Zacks Building Products - Miscellaneous industry primarily comprises manufacturers, designers and distributors of home improvement and building products like ceiling systems, doors and windows, as well as flooring and metal products. Some of the industry players provide solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries.
A few industry participants offer glass fiber that is utilized to support composite materials for transportation, electronics, marine, infrastructure, wind energy as well as roofing for residential, commercial and industrial applications. The companies also manufacture expansion joints and structural bearings, ventilation products, ground mounted solar racking and commercial greenhouses, as well as mail storage (solutions including mailboxes and package delivery products).
Moreover, companies under this industrial cohort rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities.
Let’s take a look at the industry’s three major themes:
- The industry is poised to benefit from robust construction activities and a strengthening macro backdrop. Construction spending in the United States has ramped up lately, supported by a steady increase in outlays on private as well as public construction projects. Trump’s impetus to boost infrastructure spending appears as the key catalyst to the industry’s growth.
- As the industry’s prospects are highly correlated to U.S. housing market conditions and repair and remodeling activity, the prevailing slowdown may prove detrimental. As home sales tend to spur spending for building products, the latest slowdown in home sales could hurt demand. Meanwhile, higher raw material costs kept margins under pressure. Steel and aluminum tariffs, announced earlier in 2018, continue to impact material costs. Rising logistics and distribution costs are also compressing margins further.
- Nonetheless, the industry participants are increasingly focusing on pricing of products to offset the higher input and freight expenses. Cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions are also supporting bottom-line growth. The companies are also following a systematic acquisition strategy to enhance domestic and international portfolios. Again, lower mortgage rates since the beginning of 2019 appear to be boosting buyer demand for housing, which is expected to aid the industry’s performance.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Building Products – Miscellaneous industry is a 25-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #221, which places it at the bottom 14% 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 dismal 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 position in the bottom 14% 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 gradually losing confidence in this group’s earnings growth potential. Since December 2018, the industry’s earnings estimate for the current year has gone down by approximately 19.3%.
Despite the industry’s gloomy near-term view, we will present a few building products stocks that one can hold on to. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
The Zacks Building Products – Miscellaneous industry has lagged the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.
During this period, the industry has declined 11.% versus the broader sector’s decline of 4.2%. Meanwhile, the Zacks S&P 500 composite has witnessed growth of 10.8%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing building products’ stocks, the industry trades at 10.9X versus the S&P 500’s 17.3X and the sector’s 14.1X.
Over the past five years, the industry has traded as high as 18X, as low as 7.8X and at the median of 14.6X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Focus on expanding footprint and product portfolio through acquisitions, along with cost-saving initiatives, are expected to drive the industry’s growth. Also, investing in new products, support services as well as advanced manufacturing capabilities should boost revenues. However, rising freight as well as raw material costs might keep margins under pressure.
Below we present two stocks from the Zacks Building Products - Miscellaneous space that carry a Zacks Rank #2 (Buy) each. Investors might also prefer holding on to three stocks that have impressive growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arcosa, Inc. (ACA): This Dallas, TX-based company manufactures and sells infrastructure-related products and services for the construction, energy and transportation markets. This stock carries a Zacks Rank #2 and its EPS estimates for the current year have witnessed upward revision of 3.9% in the past 60 days.
Price & Consensus: ACA
Construction Partners, Inc. (ROAD): Headquartered in Dothan, Alabama, this is an infrastructure and road construction company. This Zacks Rank #2 company has a three-five year expected EPS growth rate of 10%.
Price & Consensus: ROAD
Foundation Building Materials, Inc. (FBM): This Tustin, CA-based building products distributor in the United States and Canada currently carries a Zacks Rank #3 (Hold). The consensus estimate for 2019 earnings indicates year-over-year growth of 109.8%.
Price & Consensus: FBM
United Rentals, Inc. (URI): This Stamford, CT based equipment rental company has a Zacks Rank #3. The consensus estimate for 2019 earnings indicates year-over-year growth of 21%.
Price & Consensus: URI
Gibraltar Industries, Inc. (ROCK): This Buffalo, New York based building products manufacturer and distributor currently carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for the current year indicates year-over-year growth of 17.8%.
Price & Consensus: ROCK
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