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NCI Building Systems Stays Neutral (revised)

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We reiterate our Neutral recommendation on NCI Building Systems Inc. (NCS). Our recommendation on NCI Building Systems is in line with a short-term Zacks #3 Rank (Hold).

The company reported an adjusted loss of 32 cents per share for first-quarter of 2012, narrower than the Zacks Consensus Estimate of a loss of 69 cents. Sales increased 28.2% to $243.6 million, surpassing the Zacks Consensus Estimate of $210 million.

The company suffered since last year as it faced difficult business conditions due to unprecedented reduction in the demand for new constructions. According to the report of Mc-Graw Hill, during the first-quarter of 2012, low-rise nonresidential construction activity declined 6.4% (measured in square feet).

However, McGraw-Hill Constructions has predicted that construction activities would increase in 2012 as compared to 2011. Further, it expects that 2012 non-residential construction activity measured in square feet will be 2% higher and increase 2% in dollar value compared to 2011. It projects square footage at 685 million in 2012 increasing from the previous year’s 673 million.

Bookings during first-quarter of 2012 increased 16% above the comparable period in 2011. At the end of the quarter, backlog went up 3.2% sequentially and 8.4% year over year to $222 million. During the recent quarters, the company’s rate of converting backlog into production has become 30% faster than the 2010 levels.

Recently, NCI Building Systems has entered into a deal to acquire Metl-Span LLC, a leader in the advancement of insulated panel technology, for $145 million. It serves the Architectural, Commercial, Industrial and Cold Storage industries (non-residential building products market) with energy efficient and cost-effective insulated metal wall and roof panels and operates in five manufacturing facilities in North America.

It is expected that the acquisition of Metl-Span by NCI Building Systems will position the latter as a leader in the insulated metal panel business by diversifying and expanding its existing product range. In addition, NCI Building Systems will also be benefited by a growing customer base as well as distribution network in North America. The company expects the acquisition to be accretive to its earnings in fiscal 2012.

On the flip side, the company depends highly on steel, one of the most important raw materials. Thus, its business is considerably influenced by steel prices. Moreover, the steel industry is cyclical in nature and prices remained highly volatile in recent years. There is also the apprehension of the steel prices remaining volatile in future causing margin headwinds.

Moreover, the operational activities of NCI Building Systems are dependent on rigid and complicated environmental laws and regulations. These regulations are on air emissions, emission of green house gases and solid and hazardous industrial waste. Various administrative, civil or criminal enforcement measures would be taken against the company if it fails to adhere to the regulations.

Based in Houston, Texas, NCI Building Systems is one of the largest integrated manufacturers of metal products for the North American non-residential construction industry. It has 31 manufacturing plants located across the United States and Mexico, as well as distribution facilities throughout the U.S. and Canada.

(NOTE: We are re-issuing this story to correct some inaccuracies. The original version, published earlier today, May 15, 2012, stated that NCI Building Systems competes with companies like CRA International Inc. (CRAI), FTI Consulting, Inc. (FCN) and Huron Consulting Group Inc. (HURN).

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