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Strong demand arising from the V-shared recovery in the housing market and a surge in repair and remodel (R&R) and “do-it-yourself” (DIY) activity will benefit companies under the Zacks Building Products – Miscellaneous industry. Apart from the stable end-market demand, benefits from geographic and product diversification strategies, operational excellence and accretive buyouts are expected to provide more strength.
Advanced Drainage Systems, Inc. (WMS), Installed Building Products, Inc. (IBP), TopBuild Corp. (BLD), Masco Corporation (MAS) and Gibraltar Industries, Inc. (ROCK) are set to benefit from increasing demand from strong housing/R&R activities.
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 out equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities.
3 Trends Shaping the Future of the Building Products Industry
Robust Housing & Repair & Remodeling Market: Solid near-term prospects of the housing market backed by rising need for more work-at-home space and record-low mortgage rates are expected to be a major tailwind for industry participants. Precisely, strong demand stemming from an improved residential construction market has been a major boon for industry participants.
Meanwhile, the working from home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to take on more DIY projects and other home improvement projects. So, the industry stands to benefit from strong gains from repair and remodeling activity.
Operational Excellence, Product Innovation & Acquisitions: The industry participants have been following strong cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions to boost profitability. 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 supplement organic growth and expand access to additional markets and products.
Tariff-Related Woes & Softness in Industrial Market: Continued volatility in material costs, owing to tariff-related issues, has 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. Meanwhile, persistent softness in demand for core products in the industrial market is a cause of concern. Industrial activity has deteriorated more than construction given the domino effect of COVID-19 on different parts of the industrial economy.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products – Miscellaneous industry is a 26-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #27, which places it at the top 11% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since June 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 26.4% and 15.4%, respectively, upward.
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 Outperforms Sector & S&P 500
The Zacks Building Products – Miscellaneous industry has outperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has risen 20.5% compared with the S&P 500’s growth of 10.9% and the broader sector’s 11% rally.
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 16.7X versus the S&P 500’s 21.6X and the sector’s 17X.
Over the past five years, the industry has traded as high as 19.3X, 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
5 Building Product Stocks to Keep a Close Eye On
Advanced Drainage Systems, Inc.: This Hilliard, OH-based company is a manufacturer of thermoplastic corrugated pipe, providing a comprehensive suite of water management products and drainage solutions. The Zacks Rank #1 (Strong Buy) company has been benefiting from strong performance in key growth states like the Carolinas, Florida, the Southeast and Utah. The company is poised to gain from its national presence as well as geographic and end market exposure, including the increased exposure to the Residential end market owing to Infiltrator acquisition in 2019. Also, prudent operational initiatives, contributions from the proactive cost mitigation steps announced in March, and leverage from the sales growth in both pipe and Allied products bode well.
Importantly, Advanced Drainage Systems has seen upward estimate revisions for its fiscal 2021 earnings over the past 60 days by 58.8%. The stock has gained 85.7% in the past year, performing better than the industry’s 20.5% rally. Earnings for fiscal 2021 are expected to grow 175.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: WMS
Installed Building Products, Inc.: Headquartered in Columbus, OH, this company operates as a residential insulation installer in the United States. Favorable pricing strategies, stable end-market demand, and benefits from geographic and product diversification strategies are expected to drive growth for this Zacks Rank #1 company. Also, a strong home improvement industry backdrop along with solid housing fundamentals will act as added positives.
Installed Building Products has seen upward estimate revisions of 36.6% for its 2020 earnings over the past 60 days. The stock has gained 64.2% in the past year. The company’s earnings for 2020 are expected to increase 25.8%.
Price and Consensus: IBP
TopBuild Corp.: Daytona Beach, FL-based TopBuild is an installer and distributor of insulation and other building products to the U.S. construction industry. The company’s strength in the Insulation Installation business and improving R&R activities will drive growth. Also, its systematic inorganic strategy will supplement its organic growth and expand access to additional markets and products.
This Zacks Rank #1 company has seen upward estimate revisions for its 2020 earnings over the past 60 days by 28.5%. The stock has gained 68.7% in the past year. The company’s earnings for 2020 are expected to increase 16.6%.
Price and Consensus: BLD
Masco Corporation: Headquartered in Taylor, MI, Masco manufactures, sells and installs home improvement and building products. Its inorganic strategies, cost-saving initiatives and industry-leading branded building products will boost Masco’s bottom line. Solid R&R activity, strong housing industry backdrop and its focus on acquisitions/divestures are encouraging.
This Zacks Rank #1 company has seen upward estimate revisions for its 2020 earnings over the past 60 days by 13%. The stock has gained 40.6% in the past year. The company’s earnings for 2020 are expected to increase 20%.
Price and Consensus: MAS
Gibraltar Industries Inc.: Buffalo, NY-based Gibraltar manufactures and distributes building products for the renewable energy, conservation, residential, industrial, and infrastructure markets. The company has been benefiting from the three-pillar value creation strategy, strengthening housing market and strong Renewable Energy & Conservation business. Also, improvement in Residential Products, product and service mix, better price material cost management and operational excellence add to the positives.
This Zacks Rank #2 (Buy) company has seen a 24.8% upward estimate revision for its 2020 earnings over the past 60 days. The stock has gained 35.3% in the past year. The company’s earnings for 2020 are expected to improve 15.1%.
Price and Consensus: ROCK
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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Advanced Drainage Systems, Inc. (WMS): Free Stock Analysis Report
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