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).
Companies in this industrial cohort also rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities.
Prominent stocks in this industry are United Rentals, Inc. (URI) and Masco Corporation (MAS).
Let’s take a look at the industry’s three major themes:
The industry is expected to bear the brunt of the COVID-19 pandemic in the near term. The industry’s prospects are highly correlated with the U.S. housing market condition and repair and remodeling (R&R) activity. Now the bleak near-term prospects of the housing market amid the coronavirus-induced high unemployment and supply-side challenges are eating into the industry participants’ profits. Weak demand for new commercial and residential buildings is anticipated to continue affecting the product pipelines of firms in the industry. Also, shelter-in-place orders and other end-market restrictions have affected many industrial activities, thereby hurting top lines of the industry players.
Continued volatility in material costs, owing to tariff-related issues, have been a pressing concern. The lingering trade conflict between the United States and China is taking a toll on U.S. business activities and hence margins. Rising labor costs are also compressing margins further. Moreover, the challenging oil and gas market scenario has been affecting demand for the industry players’ services and products.
Nonetheless, the industry stands to benefit from strong gains from repair and remodeling activity and increased government spending on infrastructure projects. Despite the uncertainties arising from the pandemic, the repair and remodel market has been going strong. Under “working-from-home” or “stay-at-home” orders, consumers are prioritizing home improvement projects which is driving demand. Meanwhile, cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions are supporting bottom-line growth. The industry participants have also been strategically investing in new products, sales and support services, digitally-enabled solutions and advanced manufacturing capabilities to boost revenues. The companies are also following a systematic acquisition strategy to enhance domestic and international portfolios.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Building Products – Miscellaneous industry is a 27-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #221, which places it at the bottom 13% 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 gloomy 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 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 gradually losing confidence in this group’s earnings growth potential. Since January 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 39.6% and 30.5%, respectively, downward.
Despite the industry’s dull near-term prospects, we will present a few stocks that one can buy or hold on to. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector, Lags S&P 500
The Zacks Building Products – Miscellaneous industry has outperformed the broader Zacks Construction sector but lagged the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 1.9% compared the broader sector’s 9.7% fall. Meanwhile, the Zacks S&P 500 composite has risen 0.7% during the period.
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 17.3X versus the S&P 500’s 20.8X and the sector’s 16.3X.
Over the past five years, the industry has traded as high as 17.8X, as low as 7.2X and at the median of 13.8X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Increased R&R activity and focus on expanding footprint and product portfolio through acquisitions along with cost-saving initiatives are expected to drive the industry. Also, investing in new products, support services and advanced manufacturing capabilities should boost revenues. However, disruptions in construction and industrial activities due to the coronavirus pandemic will have a temporary impact on volumes. Also, tariff-related issues have been compressing the companies’ margins as well as volumes.
Currently, there are only two top-ranked stocks in the Zacks universe of Building Products companies that are standing tall despite weak industry fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
frontdoor, inc. (FTDR): This Memphis, TN-based company provides home service plans in the United States and currently has a Zacks Rank #2 (Buy). Its estimates for 2020 earnings have witnessed upward revision of 4.7% in the past 30 days. The company has a three-five year expected EPS growth rate of 14.5%.
Price & Consensus: FTDR
Otis Worldwide Corporation (OTIS): Headquartered in Farmington, CT, this company manufactures, installs, and services elevators and escalators worldwide and currently carries a Zacks Rank #2. Its estimates for 2020 earnings have witnessed upward revision of 3.8% in the past 30 days.
Price & Consensus: OTIS
Investors may also hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid prospects.
Foundation Building Materials, Inc. (FBM): Headquartered in Santa Ana, CA, this company distributes building products in the United States and Canada. The company has a three-five year expected EPS growth rate of 10.9%.
Price & Consensus: FBM
Masco Corporation: This Livonia, MI-based company manufactures, sells and installs home improvement and building products. The company has a three-five year expected EPS growth rate of 9%.
Price & Consensus: MAS
Below is one stock with a bearish Zacks Rank that we would recommend investors to steer clear of for the time being.
Patrick Industries, Inc. (PATK): This Elkhart, IN-based company manufactures and distributes building products and materials for the recreational vehicle, marine, manufactured housing, and industrial markets in the United States and Canada. This Zacks Rank #5 (Strong Sell) company’s 2020 earnings per share are expected to decline 51.2%.
Price and Consensus: PATK
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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United Rentals, Inc. (URI) : Free Stock Analysis Report
Patrick Industries, Inc. (PATK) : Free Stock Analysis Report
Otis Worldwide Corporation (OTIS) : Free Stock Analysis Report
Masco Corporation (MAS) : Free Stock Analysis Report
Frontdoor, Inc. (FTDR) : Free Stock Analysis Report
Foundation Building Materials, Inc. (FBM) : Free Stock Analysis Report
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