Mixed Outlook for Retail Building Products Amid Coronavirus

Lynne M. Centeno

The Building Products – Retail industry comprises U.S. home improvement retailers, manufactures of industrial and construction materials and distributors of wallboard and ceilings systems. Some of the industry participants also offer products and services for home decoration, repair and remodeling, and in-home delivery and installation services.

The industry players provide a wide array of products, ranging from cement or concrete foundation materials to roofing boards and shingles. The companies also sell lumber, insulation materials, drywall, plumbing fixtures, hard-surface flooring, lawn and garden, and decor products. Some players also deal in threaded fastener products, and manufactured and natural stone tiles. The industry players cater to professional homebuilders, sub-contractors, remodelers and consumers.

Let’s take a look at the industry’s three major themes:

  • The industry’s prospects remain closely tied to U.S. housing market conditions, and repair and remodeling (R&R) activity. The bleak near-term prospects of the housing market amid coronavirus-induced high unemployment and supply-side challenges are weighing on 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. Moreover, shelter-in-place orders and other end-market restrictions have affected many industrial activities. These could continue to hurt top lines of companies.
     
  • Nevertheless, as consumers stay at home, a surge in repairs and home remodeling projects is palpable. With the operations of home improvement retailers deemed essential, these companies continue to operate stores amid the pandemic, though with shortened operating hours to implement cleaning protocols and enable restocking shelves. Further, steps like limiting customer traffic in stores and canceling high-traffic events like Spring Black Friday are being taken. Apart from essentials, these retailers are witnessing higher demand for gardening and other stay at home activities related products. These efforts along with their ability to cater to the rise in online demand, due to the pandemic, should aid top-line performance. Meanwhile, home improvement retailers are incurring additional costs to provide enhanced benefits to associates at stores and distribution centers. These increased costs could hurt the bottom line.
     
  • Overall, the building products industry is focusing on digitization and innovation. The industry participants have undertaken strategies to connect offline and online channels to bolster growth, with improved customer engagement and supply-chain access. Retailers are embracing a completely integrated digital platform to cater to growing online purchases. These efforts are likely to aid the industry participants’ profits in the post-pandemic scenario. Additionally, initiatives to boost Professional (Pro) customer sales with enhanced service capabilities like tool rental, delivery and the B2B website should support the top and bottom lines. Meanwhile, the industry participants are increasingly focusing on pricing of products and other actions to offset higher input expenses.

Zacks Industry Rank Indicates Bleak Prospects

The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. It carries a Zacks Industry Rank #173, which places it at the bottom 28% 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, is discouraging for the near term. 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 positioning 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. The industry’s earnings estimates for the current year have moved up 10.6% in the past year.

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 Shareholder Returns

The Zacks Building Products – Retail Industry has outperformed both the S&P 500 and its own sector in the past year.

While the stocks in this industry have collectively gained 27.4%, the Zacks S&P 500 composite has moved up 7.4%. Meanwhile, the Zacks Retail-Wholesale sector has witnessed growth of 20.2% over this period.

One-Year Price Performance

Building Products – Retail Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is the commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 22.09X compared with the S&P 500’s 21.75X. Further, the sector’s forward-12-month P/E stands at 31.01X.

Over the last five years, the industry has traded as high as 22.09X and as low as 16.02X, with the median being at 19X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Amid the coronavirus pandemic, housing market prospects remain bleak on high unemployment and supply-side challenges, which are weighing on profits of the industry participants. However, home improvement retailers stand to gain from increased demand for repairs and remodeling. Efforts to expand digital platforms and product innovation are likely to improve customer experience, even in the post-pandemic markets. However, higher operating expenses related to hike in remuneration to staff as well as increased sanitization protocols may weigh on the bottom line.

While none of the stocks in the Zacks Building Products – Retail universe currently holds a Zacks Rank #1 (Strong Buy), we have mentioned two stocks with a Zacks Rank #2 (Buy). We also highlight three other stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look:

Lowe’s Companies Inc. (LOW): The stock of this Mooresville, NC-based home improvement retailer has risen 37.3% in the past year. The Zacks Consensus Estimate for its current-year EPS has moved up 3.9% in the past seven days. The company has a long-term earnings growth rate of 15.2% and a Zacks Rank #2.

Price and Consensus: LOW

Fastenal Company (FAST): This Winona, MN-based wholesale distributor of industrial and construction products has gained 32.9% in the past year. The Zacks Consensus Estimate for its current-year EPS has moved up 4.8% in the past 30 days. The company has a long-term earnings growth rate of 9%. The company currently has a Zacks Rank #2.

Price and Consensus: FAST

The Home Depot, Inc. (HD): The Atlanta, GA-based home improvement retailer has rallied 30.2% in the past year. The Zacks Consensus Estimate for its ongoing fiscal year’s earnings has been revised 0.3% upward in the last seven days. The company has a long-term earnings growth rate of 11.1%. The company currently has a Zacks Rank #3.

Price and Consensus: HD

Builders FirstSource, Inc. (BLDR): This Dallas, TX-based supplier of building materials and manufactured components has soared 53% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has been stable in the last seven days. Further, the stock has a Zacks Rank #3.

Price and Consensus: BLDR

Tecnoglass Inc. (TGLS): The Barranquilla, Colombia-based company manufactures, supplies and installs architectural glass, windows, and associated aluminum products for the commercial and residential construction industries in North, Central and South America. The Zacks Consensus Estimate for its current-year EPS has been stable in the last seven days. The company has a long-term earnings growth rate of 19%. It currently has a Zacks Rank #3.

Price and Consensus: TGLS

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