5 Building Products Stocks Riding the Industry Wave

Increased government infrastructure spending is bolstering companies in the Zacks Building Products - Miscellaneous industry. Although potential challenges like macroeconomic uncertainties, high rates, low consumer confidence, new product investments, and rising raw material costs could squeeze margins, firms such as Advanced Drainage Systems, Inc. WMS, Armstrong World Industries, Inc. AWI, Frontdoor, Inc. FTDR, Construction Partners, Inc. ROAD and Latham Group, Inc. SWIM stand to gain from operational excellence, geographic and product diversification strategies, strategic acquisitions, and higher infrastructure investments.

Industry Description

The Zacks Building Products - Miscellaneous industry primarily comprises manufacturers, designers and distributors of home improvement and building products like ceiling systems, doors, windows, flooring and metal products. Some industry players provide solutions to rehabilitate the aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries. 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 along with package delivery products). Companies in this industrial cohort also rent out equipment to a diverse customer base, including construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities.

3 Trends Shaping the Future of the Building Products Industry

U.S. Administration's Infrastructural Spending: The industry players are expected to benefit from strong global trends in infrastructure modernization, energy transition, national security and a potential super-cycle in global supply-chain investments. The U.S. administration's endeavor to rebuild the nation's deteriorating roads and bridges and fund new climate-resilient and broadband initiatives is expected to aid the companies. Meanwhile, as the industry players' business prospects are highly correlated with U.S. housing market conditions, improving residential construction markets are expected to drive growth. Builders are now cautiously optimistic for 2024 as the lack of existing inventory is shifting demand to the new home market, thereby driving the demand for companies' products in the industry.

Operational Excellence, Product Innovation & Acquisitions: The industry participants have been undertaking strong cost-saving initiatives like business consolidation, system implementations, plant/branch closures, improvement in the global supply chain and headcount reductions to boost profitability. 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.

Rising Costs: Inflationary headwinds with respect to transportation costs, material costs and energy costs have been a pressing concern. Also, rising labor costs are compressing margins. These are dampening the companies' operating performance. Although the industry participants have been working to recover higher costs through various price increases, they expect this ongoing volatility in material and transportation costs to be a concern. Apart from higher raw material costs, the companies bear expenses related to product launches. If companies are unable to offset these costs through price increases or supply-chain initiatives, their profits may be affected.

Zacks Industry Rank Indicates Bright 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 #57, which places it in the top 23% 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 positive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the top 50% of the Zacks-ranked industries is a result of a higher 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 May 2024, the industry's earnings estimates for 2024 have been revised upward to $4.80 from $4.77 per share.

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 S&P 500, Matches Sector

The Zacks Building Products – Miscellaneous industry has outperformed the Zacks S&P 500 Composite but is in line with the broader Zacks Construction sector over the past year.

Over this period, the industry has rallied 32%, the same as the broader sector's rise. Meanwhile, the Zacks S&P 500 Composite has jumped 26.2% over the same period.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing building products' stocks, the industry is trading at 16.7X versus the S&P 500's 21.6X and the sector's 17.5X.

Over the past five years, the industry has traded as high as 20.1X, as low as 11.1X and at a median of 15.9X, as the chart below shows.

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

5 Building Product Stocks to Buy Now

We have selected five stocks from the Zacks universe of building products that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Frontdoor: Based in Memphis, TN, this company provides home warranties in the United States. The company is benefiting from its focus on new and innovative ways to boost demand for services, and the relaunch of American Home Shield brand is a significant component of this strategy. Looking ahead, the company is committed to establishing a solid foundation by investing in its brand and technology infrastructure and enhancing productivity throughout the organization.

FTDR, a Zacks Rank #1 stock, has gained 49% over the past year. FTDR has seen an upward estimate revision of 8.3% for 2024 earnings over the past 30 days to $2.73 per share. The estimated figure indicates 18.7% year-over-year growth for 2024. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 279%. It currently holds a VGM Score of A.

Price and Consensus: FTDR

Construction Partners: Headquartered in Dothan, AL, this civil infrastructure company engages in the construction and maintenance of roadways across Alabama, Florida, Georgia, North Carolina and South Carolina. The company has been benefiting from solid demand for infrastructure services across its geographic footprint of more than 70 local markets in the Southeast in both the private and public sectors, supported by increased funding for public projects at federal, state, and local levels, defying labor and inflation challenges. Its recent acquisitions will help the company expand operations into fast-growing markets while maintaining its leverage ratio. Construction Partners' organic and inorganic growth opportunities in the attractive Southeastern U.S. Road construction/repair market are expected to help the company generate higher revenues.

ROAD, a Zacks Rank #1 stock, has gained 81.6% over the past year. This company surpassed earnings estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 10.6%. ROAD has seen an upward estimate revision of 2.9% for fiscal 2024 earnings over the past 30 days to $1.44 per share. Again, it carries an impressive VGM Score of B.

Price and Consensus: ROAD

Latham Group: Based in Latham, NY, Latham Group, Inc. stands as the leading designer, manufacturer, and marketer of in-ground residential swimming pools and pool accessories across North America, Australia, and New Zealand. Despite difficult industry conditions, the company has been gaining from improved cost structures, production efficiencies, lean manufacturing, value engineering programs, and lower raw material costs. It remains focused on fiberglass pools, which offer cost, installation, and eco-friendly advantages over concrete pools. The company has been expanding its product line and national dealer network, driving awareness and adoption. Meanwhile, the latest acquisition of Coverstar Central, Latham's long-time partner in automatic safety covers, is expected to enhance margins, accelerate sales growth, and strengthen relationships with pool builders, particularly for promoting fiberglass pools.

SWIM, a Zacks Rank #1 stock, has gained 46.6% over the past year. This company surpassed earnings estimates in the last reported quarter by 275%. SWIM has seen an upward estimate revision of 2024 earnings to 13 cents from break-even over the past 30 days. Again, it carries an impressive VGM Score of A.

Price and Consensus: SWIM

Advanced Drainage Systems: Headquartered in Hilliard, OH, this company provides innovative water management solutions in stormwater and on-site septic wastewater industries. The company has been experiencing positive outcomes from its Infiltrator business and the Allied products portfolio. Despite facing challenges such as higher interest rates, credit constraints, and economic unpredictability, the company anticipates growth fueled by increased demand in infrastructure, residential, and agriculture sectors. Moreover, proficient management of pricing and costs, coupled with the benefits derived from previous investments in new equipment, automation, and tooling, have significantly improved operational efficiency across the board. The material conversion strategy, complete water management solutions, and focus on key sales programs have been driving growth.

WMS, a Zacks Rank #2 stock, has gained 25.4% over the past year. WMS has seen an upward estimate revision of 0.1% for fiscal 2025 earnings over the past 60 days to $7.18 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 23.2%. It currently holds a VGM Score of B.

Price and Consensus: WMS

Armstrong World Industries: Based in Lancaster, PA, Armstrong World is a leading global manufacturer of ceiling systems primarily for commercial, institutional, and residential building construction and renovation. The company has been thriving by focusing on innovative products and pursuing strategic acquisitions to diversify its portfolio. Its recent acquisition of 3form, LLC is set to bolster the Architectural Specialties segment and strengthen connections with architects and designers. Additionally, Armstrong World has been investing in digitalization and technological advancements. Since 2022, its digital initiative, Canopy, has shown consistent quarterly growth, generating new demand for its products. Furthermore, the company's recent investments in developing new products in metal, wood, and Tectum materials are contributing positively to its performance.

AWI, a Zacks Rank #2 stock, has gained 67.4% over the past year. AWI has seen an upward estimate revision of 3.1% for 2024 earnings over the past 30 days to $6.07 per share. The company's earnings for 2024 are expected to increase 14.1%. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 15.4%.

Price and Consensus: AWI

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