Crumbling Cement - Zacks Industry Rank Analysis

Industry Rank Analysis 1-5-11

The spending from the Stimulus Bill (ARRA) is rapidly running out, and in the current environment it is highly unlikely to be renewed. A fairly significant part of the ARRA was spending on public construction projects such as roads and bridges. Construction in the private side of the economy is also far from robust.

Not surprisingly, then, the Zacks Ranks of several building related industries are currently very weak. In this article I will focus on two of the industries that are among the worst -- Cement and Miscellaneous Building Products.

I would point out that there are other related industries, such as the Building Products Retailers, Lighting Fixtures and the Home Builders themselves are not looking too good either. Also, the several of the steel-related industries look weak, and construction, particularly public and commercial, tend to also use a lot of steel.

Cement demand is closely tied to public construction activity. Almost by definition, the Miscellaneous group is harder to characterize, but it appears that many of them are also sensitive to public construction, though they are often more tied to residential construction. Not that it really matters; both areas look pretty dicey for 2011.

The Zacks industry classifications are very fine, with 255 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well -- a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts. It is interesting, however, when you see a cluster of similar industries at the top of the list...or at the bottom. 

The Cement industry is about average size with 7 firms, although none of them are exactly mega caps. The industry is in 254th place of the 255 industries we track -- an unusually poor showing for an average-sized industry. It deteriorated by five spots over the last week. Its average Zacks Rank is 4.14, up (bad) from 3.71 last week.

The Miscellaneous building products industry is bigger than with 17 firms in it. It is currently in the 229th spot on the list of industries with an average Zacks Rank of 3.35, although that is an improvement of 15 spots from last week when the average rank was 3.65.

The first table below shows the Cement and Miscellaneous Building Products stocks that hold the dreaded Zacks #5 Rank (Strong Sell). The second table shows the Zacks #4 Rank (Sell) firms. Most of the firms are on the small side, and thus might be difficult to short, or not have options available to buy puts on them. There are a few larger firms on the #4 list, even if they are based abroad.

In addition to looking ugly based on estimate momentum and surprises, none of these firms look particularly compelling on a P/E basis, even using 2011 earnings. An N/A in the P/E column means that the company is expected to be in the red that year. Expectations are falling fast, and an estimate in motion tends to remain in motion.

In other words, the actual earnings could be much lower, and thus the true P/Es much higher. People buying these stocks have to be doing so on the hope of a turnaround. A Zacks score of #4 or #5 means that the turnaround is not likely to happen anytime soon.

Turnaround situations that don't turn are the best stocks to avoid. In general, it is still to early to bet on a rebound in the construction sector, unless you have a very strong contrarian bent and a long investment time horizon.

Number 5 Ranked Firms
Company Ticker Market Cap ($ mil) P/E Using Curr FY Est P/E Using Next FY Est % Change Curr FY Est - 4 wk % Change Next FY Est - 4 wk Current Price
Vulcan Matls Co. VMC $5,695 N/A N/A 0.13% 0.00% $44.36
Martin Mrt-Matl MLM $4,200 47.03 35.68 0.00% 0.00% $92.24
James Hardi-Adr JHX $3,072 27.34 20.39 0.00% 0.00% $35.27
Ameron Intl Cp AMN $706 19.89 N/A -4.36% N/A $76.37
China Adv Cons CADC $82 4.78 3.87 0.00% 0.00% $4.68

Number 4 Ranked Firms

Company Ticker Market Cap ($ mil) P/E Using Curr FY Est P/E Using Next FY Est % Change Curr FY Est - 4 wk % Change Next FY Est - 4 wk Current Price
Lafarge Sa-Adr LFRGY $18,058 17.51 12.22 0.00% 0.00% $15.76
Cemex Sa Adr CX $10,712 N/A N/A -0.11% -0.93% $10.71
Masco MAS $4,539 47.47 26.87 0.00% 0.00% $12.66
Usg Corp USG $1,731 N/A N/A -0.65% -3.56% $16.83
Simpson Mfg Inc SSD $1,528 29.44 24.03 -0.12% -0.87% $30.91
Eagle Materials EXP $1,248 48.61 38.59 -3.75% -4.24% $28.25
Interline Brand IBI $753 20.95 16.7 0.00% 0.00% $22.77
Quanex Bldg Prd NX $714 28.45 19.51 -17.86% -19.30% $18.97
Nci Bldg System NCS $274 N/A 58.29 -79.28% 84.61% $13.99

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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