Miscellaneous Building Products Industry Prospects Somber

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.

Some of the prominent stocks in this industry are United Rentals, Inc. (URI), Masco Corporation (NYSE:MAS) (MAS), and Armstrong World Industries, Inc. (AWI).

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. Precisely, strong infrastructure demand and improving non-residential construction demand trends have been a boon for the industry participants. 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 deceleration in home sales could hurt demand. Meanwhile, higher raw material costs kept margins under pressure. The lingering trade conflict between the United States and China is taking a toll on U.S. business activities and hence margins. 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 expenses. 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 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 23-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #174, which places it at the bottom 32% 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 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 March 2019, the industry’s earnings estimate for the current year and the next has gone down by approximately 5.5% and 10.3%, respectively.

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 4.5% versus the broader sector’s decline of 4.4%. Meanwhile, the Zacks S&P 500 composite has witnessed a decline of 0.6%.

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 10.5X versus the S&P 500’s 16.6X and the sector’s 14.2X.

Over the past five years, the industry has traded as high as 17.9X, as low as 7.2X and at the median of 14.3X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500




Bottom Line

Focus on expanding footprint and product portfolio through acquisitions along with cost-saving initiatives is expected to drive the industry. Also, investing in new products, support services as well as advanced manufacturing capabilities should boost revenues. However, the U.S.-China trade spat is likely to impact the companies’ margins as well as volumes. In order to mitigate tariff-related woes, higher pricing may have a temporary impact on volume. Rising raw material costs might keep margins under pressure.

Below we present four stocks from the Zacks Building Products - Miscellaneous space that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Frontdoor, Inc. (FTDR): Based in TN, United States, this company is the nation’s leading provider of home service plans and currently sports a Zacks Rank #1. The company has an expected three-five year EPS growth rate of 15.5%.

Price & Consensus: FTDR



Gibraltar Industries, Inc. (ROCK): This Buffalo, NY-based building products manufacturer and distributor currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings indicates year-over-year growth of 15.9%.

Price & Consensus: ROCK




Construction Partners, Inc. (ROAD): Headquartered in Dothan, AL, this is an infrastructure and road construction company. This Zacks Rank #2 company is expected to witness 16.5% earnings growth for fiscal 2020.

Price & Consensus: ROAD

Aegion Corporation (AEGN): Based in Chesterfield, MO, this company provides cured-in place pipe and other technologies and services for the rehabilitation of pipeline systems. This Zacks Rank #2 company has a three-five year expected EPS growth rate of 10%.

Price & Consensus: AEGN

Meanwhile, investors might also prefer holding on to the following stock that has impressive prospects.

United Rentals, Inc.: This Stamford, CT-based equipment rental company has a Zacks Rank #3 (Hold). The consensus estimate for its 2019 earnings suggests year-over-year growth of 18.7%. It also has a three-five year expected EPS growth rate of 17.8%.

Price & Consensus: URI

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