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Building Products Industry Looks Promising: 5 Stocks to Buy
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Increased government infrastructure spending is bolstering companies in the Zacks Building Products - Miscellaneous industry. Although potential challenges like macroeconomic uncertainties, new product investments, and rising raw material costs could squeeze margins, firms such as TopBuild Corp. (BLD - Free Report) , Arcosa, Inc. (ACA - Free Report) , Frontdoor, Inc. (FTDR - Free Report) , Gibraltar Industries, Inc. (ROCK - Free Report) , and Construction Partners, Inc. (ROAD - Free Report) stand to gain from increased repair and remodeling (R&R) projects, 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 & Improving Residential Market: 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 and the R&R activity, solid momentum in the R&R markets and improving residential construction markets are expected to drive growth. Builders are now cautiously optimistic for 2023 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.
Supply Chain & Inflationary Woes: Inflationary headwinds with respect to transportation costs, material costs and energy costs owing to supply-chain disruptions have been a pressing concern. Also, rising labor costs are compressing margins. These are dampening the companies’ operating performance. Rising costs related to steel, asphalt, resin and other input materials are also hurting margins. 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 persist in the near term. Meanwhile, the companies have been witnessing short-term project delays due to material and labor shortages that are impacting upstream building activity. This may result in a lower backlog in the near term.
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 26-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #19, which places it in the top 8% 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 July 2023, the industry’s earnings estimates for 2023 and 2024 have been revised upward to $4.14 and $4.53 per share from $3.94 and $4.29, respectively.
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 Lags Sector, Outperforms S&P 500
The Zacks Building Products – Miscellaneous industry has underperformed the broader Zacks Construction sector but outperformed the Zacks S&P 500 composite over the past year.
Over this period, the industry has rallied 31.1% compared with the broader sector’s 36.1% rise. Meanwhile, the Zacks S&P 500 composite has jumped 14.6% 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 13.4X versus the S&P 500’s 19.2X and the sector’s 14.4X.
Over the past five years, the industry has traded as high as 19.9X, as low as 6.9X and at a median of 14X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
TopBuild: Headquartered in Daytona Beach, FL, TopBuild is an installer and distributor of insulation and other building products. The company is experiencing significant advantages due to a strong installation business and well-planned acquisitions. Additionally, improvements in operational efficiency, leveraging fixed costs, and implementing measures to mitigate inflation are all contributing to an increase in profit margins.
TopBuild, a Zacks Rank #1 stock, has gained 71.2% year to date (YTD), outperforming the industry’s 28.5% rise. BLD has seen an upward estimate revision of 1.5% and 1.3% for 2023 and 2024 earnings over the past 30 days to $18.16 per share and $19.33 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 14.1%. It currently holds a VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.
Price and Consensus: BLD
Gibraltar Industries: Buffalo, NY-based Gibraltar manufactures and distributes products to the industrial and buildings market. The company is well-positioned to capitalize on its robust Three-Pillar growth strategy and the promising prospects of its Infrastructure segment. Furthermore, factors such as enhanced solar module supply, greater volume, supply-chain optimization efforts, cost alignment, improved field operations efficiency, business diversification, and the successful implementation of the 80/20 initiatives are all contributing positively to its outlook.
Gibraltar, a Zacks Rank #1 stock, has gained 52.3% YTD. ROCK has seen an upward estimate revision of 5.6% and 1.8% for 2023 and 2024 earnings over the past 30 days to $3.97 per share and $4.51 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 11.2%. It currently holds a VGM Score of A.
Price and Consensus: ROCK
Frontdoor: Based in Memphis, TN, the company provides home service plans in the United States. The company is benefiting from impressive customer retention rates. Thanks to the robust awareness of the Frontdoor brand, it has been shifting its attention toward capitalizing on customer demand. This strategic move allows FTDR to redirect its marketing investments toward expanding its Direct-to-Consumer channel under the American Home Shield brand. Looking ahead, the company is committed to establishing a solid foundation by investing in its brand, technology infrastructure and enhancing productivity throughout the organization.
Frontdoor, a Zacks Rank #1 stock, has gained 52.5% YTD. FTDR has seen an upward estimate revision of 17.4% and 12.7% for 2023 and 2024 earnings over the past 60 days to $1.62 per share and $1.87 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 150%. It currently holds a VGM Score of B.
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 benefited from solid demand for infrastructure services throughout end markets in both the private and public sectors, consistent execution of its business model and a growth strategy that defies labor, inflation and supply-chain challenges. Its recent acquisitions and the sale of Daurity Springs Quarry 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 #2 stock, has gained 34.2% YTD. 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 20% and 20.8% for 2023 and 2024 earnings over the past 60 days to 84 cents per share and $1.16 per share, respectively. Again, it carries an impressive VGM Score of A.
Price and Consensus: ROAD
Arcosa: This Dallas, TX-based company provides infrastructure-related products and solutions. The company remains focused on its long-term vision to lessen the complexity of Arcosa’s overall portfolio and shift its business mix toward less cyclical, higher-margin growth opportunities that leverage core strengths and drive long-term shareholder value creation. It has completed the previously announced sale of its storage tanks business and aims to invest the proceeds into its key growth businesses. Also, ACA’s inorganic drive to expand its portfolio and improved efficiencies in utility structures business, coupled with solid execution in cyclical businesses, should drive growth.
Arcosa, a Zacks Rank #2 stock, has gained 36.2% YTD. ACA has seen an upward estimate revision of 1.8% and 0.9% for 2023 and 2024 earnings over the past 60 days to $2.82 per share and $3.29 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 47.5%. It currently holds a VGM Score of B.
Price and Consensus: ACA
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Building Products Industry Looks Promising: 5 Stocks to Buy
Increased government infrastructure spending is bolstering companies in the Zacks Building Products - Miscellaneous industry. Although potential challenges like macroeconomic uncertainties, new product investments, and rising raw material costs could squeeze margins, firms such as TopBuild Corp. (BLD - Free Report) , Arcosa, Inc. (ACA - Free Report) , Frontdoor, Inc. (FTDR - Free Report) , Gibraltar Industries, Inc. (ROCK - Free Report) , and Construction Partners, Inc. (ROAD - Free Report) stand to gain from increased repair and remodeling (R&R) projects, 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 & Improving Residential Market: 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 and the R&R activity, solid momentum in the R&R markets and improving residential construction markets are expected to drive growth. Builders are now cautiously optimistic for 2023 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.
Supply Chain & Inflationary Woes: Inflationary headwinds with respect to transportation costs, material costs and energy costs owing to supply-chain disruptions have been a pressing concern. Also, rising labor costs are compressing margins. These are dampening the companies’ operating performance. Rising costs related to steel, asphalt, resin and other input materials are also hurting margins. 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 persist in the near term. Meanwhile, the companies have been witnessing short-term project delays due to material and labor shortages that are impacting upstream building activity. This may result in a lower backlog in the near term.
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 26-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #19, which places it in the top 8% 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 July 2023, the industry’s earnings estimates for 2023 and 2024 have been revised upward to $4.14 and $4.53 per share from $3.94 and $4.29, respectively.
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 Lags Sector, Outperforms S&P 500
The Zacks Building Products – Miscellaneous industry has underperformed the broader Zacks Construction sector but outperformed the Zacks S&P 500 composite over the past year.
Over this period, the industry has rallied 31.1% compared with the broader sector’s 36.1% rise. Meanwhile, the Zacks S&P 500 composite has jumped 14.6% 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 13.4X versus the S&P 500’s 19.2X and the sector’s 14.4X.
Over the past five years, the industry has traded as high as 19.9X, as low as 6.9X and at a median of 14X, 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). You can see the complete list of today’s Zacks #1 Rank stocks here.
TopBuild: Headquartered in Daytona Beach, FL, TopBuild is an installer and distributor of insulation and other building products. The company is experiencing significant advantages due to a strong installation business and well-planned acquisitions. Additionally, improvements in operational efficiency, leveraging fixed costs, and implementing measures to mitigate inflation are all contributing to an increase in profit margins.
TopBuild, a Zacks Rank #1 stock, has gained 71.2% year to date (YTD), outperforming the industry’s 28.5% rise. BLD has seen an upward estimate revision of 1.5% and 1.3% for 2023 and 2024 earnings over the past 30 days to $18.16 per share and $19.33 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 14.1%. It currently holds a VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.
Price and Consensus: BLD
Gibraltar Industries: Buffalo, NY-based Gibraltar manufactures and distributes products to the industrial and buildings market. The company is well-positioned to capitalize on its robust Three-Pillar growth strategy and the promising prospects of its Infrastructure segment. Furthermore, factors such as enhanced solar module supply, greater volume, supply-chain optimization efforts, cost alignment, improved field operations efficiency, business diversification, and the successful implementation of the 80/20 initiatives are all contributing positively to its outlook.
Gibraltar, a Zacks Rank #1 stock, has gained 52.3% YTD. ROCK has seen an upward estimate revision of 5.6% and 1.8% for 2023 and 2024 earnings over the past 30 days to $3.97 per share and $4.51 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 11.2%. It currently holds a VGM Score of A.
Price and Consensus: ROCK
Frontdoor: Based in Memphis, TN, the company provides home service plans in the United States. The company is benefiting from impressive customer retention rates. Thanks to the robust awareness of the Frontdoor brand, it has been shifting its attention toward capitalizing on customer demand. This strategic move allows FTDR to redirect its marketing investments toward expanding its Direct-to-Consumer channel under the American Home Shield brand. Looking ahead, the company is committed to establishing a solid foundation by investing in its brand, technology infrastructure and enhancing productivity throughout the organization.
Frontdoor, a Zacks Rank #1 stock, has gained 52.5% YTD. FTDR has seen an upward estimate revision of 17.4% and 12.7% for 2023 and 2024 earnings over the past 60 days to $1.62 per share and $1.87 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 150%. It currently holds a VGM Score of B.
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 benefited from solid demand for infrastructure services throughout end markets in both the private and public sectors, consistent execution of its business model and a growth strategy that defies labor, inflation and supply-chain challenges. Its recent acquisitions and the sale of Daurity Springs Quarry 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 #2 stock, has gained 34.2% YTD. 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 20% and 20.8% for 2023 and 2024 earnings over the past 60 days to 84 cents per share and $1.16 per share, respectively. Again, it carries an impressive VGM Score of A.
Price and Consensus: ROAD
Arcosa: This Dallas, TX-based company provides infrastructure-related products and solutions. The company remains focused on its long-term vision to lessen the complexity of Arcosa’s overall portfolio and shift its business mix toward less cyclical, higher-margin growth opportunities that leverage core strengths and drive long-term shareholder value creation. It has completed the previously announced sale of its storage tanks business and aims to invest the proceeds into its key growth businesses. Also, ACA’s inorganic drive to expand its portfolio and improved efficiencies in utility structures business, coupled with solid execution in cyclical businesses, should drive growth.
Arcosa, a Zacks Rank #2 stock, has gained 36.2% YTD. ACA has seen an upward estimate revision of 1.8% and 0.9% for 2023 and 2024 earnings over the past 60 days to $2.82 per share and $3.29 per share, respectively. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 47.5%. It currently holds a VGM Score of B.
Price and Consensus: ACA