Construction Products Industry to Thrive: 5 Stocks for Higher Returns – October 21, 2021
Strong demand resulting from strong dynamics in the housing market and repair, renovation and DIY activities will benefit companies in the Zacks Construction Products – Miscellaneous segment. In addition to stable demand in the end market, the advantages of geographic and product diversification strategies, operational excellence as well as accretive buyouts should give them more strength. Masco Company (MAS – Free report), Owens Corning (CO – Free report), Advanced Drainage Systems, Inc. (WMS – Free report), TopBuild Corp. (BLD – Free report) and Construction Partners, Inc. (ROAD – Free Report) should benefit from the tailwinds mentioned above.
The Zacks Construction Products – Miscellaneous segment primarily comprises manufacturers, designers and distributors of home improvement and construction products such as ceiling systems, doors and windows as well as flooring and metal products. Some of the industry players are offering solutions to rehabilitate aging infrastructure, mainly pipelines in the wastewater, water, energy, mining and refining sectors. The companies also manufacture expansion joints and structural bearings, ventilation products, solar floor shelving and commercial greenhouses as well as mail storage (solutions including letterboxes and parcel delivery products). The companies in this industrial cohort also lease equipment to a diverse clientele that includes construction and industrial companies, manufacturers, utilities, municipalities, landlords as well as government entities.
3 trends shaping the future of the construction products industry
Robust housing, repair and renovation markets: The positive momentum in the housing market, supported by the growing need for more home workspace and record mortgage rates, continues to act as a major tailwind for industry participants. Specifically, the strong demand stemming from an improved residential construction market has been a major boon for industry participants.
Meanwhile, work-from-home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to take on more DIY and home improvement projects. Thus, industry participants like Otis Global Society (OTIS – Free Report) and others are expected to benefit from a sharp increase in housing activity as well as repair and renovation.
Operational Excellence, Product Innovation & Acquisitions: Industry participants have led strong cost reduction initiatives such as business consolidation, systems implementation, plant / branch closures, global supply chain improvement and downsizing to increase profitability. Industry players have also strategically invested in new products, sales and support services, digital solutions as well as advanced manufacturing capabilities to increase revenue. The companies also follow a systematic acquisition strategy to complement organic growth and expand access to other markets as well as products.
Supply chain issues and inflation: Inflationary headwinds in transportation costs, material costs and energy costs due to supply chain disruptions have been an urgent concern. In addition, rising labor costs are squeezing margins. This slows down the operational performance of companies. Specifically, rising costs related to asphalt, resin and other raw materials added to the negatives. While companies have struggled to recoup higher costs through various price increases, they expect this continued volatility in material and transportation costs to persist in the near term as well.
Zacks industry rankings show bright prospects
Zacks Building Products Industry – Miscellaneous is a group of 28 stocks within the larger Zacks Construction industry. The industry currently holds a Zacks Industry Rank # 106, which places it in the top 42% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates strong near-term prospects. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before we feature a few stocks that you might want to consider for your portfolio, let’s take a look at the recent stock market performance and industry valuation.
Industry lags behind the S&P 500 and the sector
The Zacks – Miscellaneous construction products industry has underperformed the Zacks S&P 500 composite and the broader Zacks construction industry over the past year.
During this period, the industry grew 19.1% compared to the 32.5% growth of the S&P 500 and the 26.7% recovery of the broader sector.
One-year price performance
Current industry assessment
Based on the 12-month futures price-to-earnings ratio, which is a multiple commonly used to value construction products stocks, the industry is trading at 16.3X versus 21.5X for the S&P 500 and 14.3X. for the sector.
Over the past five years, the industry has traded up to 19.1X, up to 7X, and a median of 13.7X, as shown in the chart below.
Industry P / E Ratio (12-month futures) vs. S&P 500
5 construction product stocks to watch
We have selected two stocks from the Zacks construction universe that currently carry a Zacks Rank # 2 (Buy). We also highlighted three other stocks carrying a Zacks Rank # 3 (Hold) with strong prospects.
Construction partners: Based in Dothan, AL, this civilian infrastructure company currently carries a Zacks Rank # 2. Organic and inorganic growth opportunities in the attractive Southeastern United States road construction / repair market are expected to drive the growth of the business. Overall, its competitive advantages – comprising vertically integrated operations, scale, hot mix production, strong order backlog and strong growth through organic and acquisition strategies – are likely to help the business in the short term.
Importantly, Construction Partners has seen an upward revision of the estimate of 1.1% for FY2022 earnings over the past 30 days. The stock has gained 18.5% year-to-date, outperforming the industry rally of 7.3%. Profits for fiscal 2022 are expected to increase 48.1%.
Price and consensus: ROUTE
TopBuild: Based in Daytona Beach, Florida, TopBuild is an installer and distributor of insulation and other construction products, currently rated Zacks Rank # 2. A systematic inorganic strategy will complement organic growth and expand its access to other markets as well as products. In addition, there is hope for the company’s strength in installing insulation and improving repair and renovation activities.
Importantly, TopBuild – which has gained 23.8% so far this year – has seen a 2.2% upward revision to 2021 profit estimates over the past 60 days. Profits for 2021 are expected to grow by 47.1%.
Price and consensus: BLD
Masco: Based in Taylor, MI, Masco manufactures, sells and installs home improvement and construction products. The company strengthened thanks to strong sector performance supported by solid fundamentals in the US real estate market and repair and renovation activities. Specifically, North American plumbing continues to benefit Masco. Plus, inorganic moves, cost-cutting initiatives, and industry-leading branded construction products add to the happiness.
The stock, ranked Zacks Rank # 3, has gained 10.3% year-to-date. The company’s profits for 2021 are expected to increase by 18.6%.
Price and consensus: MAS
Advanced drainage systems: Based in Hilliard, OH, this company provides innovative water management solutions to the stormwater and on-site septic wastewater industries. Despite a challenging operating environment, the materials conversion strategy, comprehensive water management solutions and focus on key sales programs drove growth. It has experienced strong demand in the residential and agricultural end markets as well as horizontal construction in the non-residential market.
This Zacks Rank # 3 share has gained 28.3% since the start of the year. The company’s profits for fiscal 2022 are expected to increase by 46%.
Price and consensus: WMS
Owens Corning: Based in Toledo, OH, this company produces and sells building material systems as well as composite solutions. It has benefited from leading market companies, innovative products and process technologies as well as capabilities. Positive momentum in residential end markets, particularly in the US, improved manufacturing leverage and tight cost controls will likely help it deliver strong results.
This Zacks Rank # 3 share has gained 20.4% since the start of the year. The company’s profits for 2021 are expected to increase by 71.2%.
Price and consensus: OC