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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 Masco Corp., TopBuild Corp., Advanced Drainage Systems, Inc., Knife River Corp. and Arcosa, Inc. stand to gain from increased repair and remodeling (R&R) projects, improved residential market, 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 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 29-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #16, which places it in the top 6% 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 December 2023, the industry's earnings estimates for 2024 have been revised upward to $4.62 from $4.56 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 Sector, S&P 500
The Zacks Building Products – Miscellaneous industry has outperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has rallied 48.2% compared with the broader sector's 44.4% rise. Meanwhile, the Zacks S&P 500 composite has jumped 27.5% over the same period.
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 17.7X versus the S&P 500's 20.8X and the sector's 17.5X.
Over the past five years, the industry has traded as high as 20.1X, as low as 8.5X and at a median of 14.9X.
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.
Advanced Drainage Systems, a Zacks Rank #1 stock, has gained 86.2% over the past year. WMS has seen an upward estimate revision of 2.8% for fiscal 2024 earnings over the past 30 days to $5.79 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 37.1%. It currently holds a VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum.
Knife River: Headquartered in Bismarck, ND, this firm offers construction materials and contracting services throughout the United States, specializing in aggregates-based solutions. Knife River has effectively implemented its EDGE plan to enhance adjusted EBITDA margins and achieve strategic objectives. A crucial component of this strategy involves optimizing pricing to fully capture the value of core products, including aggregates, ready-mix concrete, asphalt, and contracting services.
The company has adopted a more judicious approach in selecting higher-margin projects within its contracting services division. Despite challenges, Knife River maintains a positive outlook on the long-term market strength, anticipating favorable impacts from local, state, and federal funding.
Knife River, a Zacks Rank #1 stock, has gained 105.8% since its inception on May 25, 2023, outperforming the industry's 54.1% increase. KNF has seen an upward estimate revision of 5.1% for 2024 earnings over the past 30 days to $3.50 per share. The company's earnings surpassed the Zacks Consensus Estimate in the last two reported quarters, the average being 60.5%. It currently holds a VGM Score of B.
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.
The company is benefiting from significant tailwinds in infrastructure and heavy manufacturing projects, alongside improved conditions in single-family residential construction within its operational regions. Leveraging its disciplined commercial approach, the company has successfully increased unit profitability in both natural and recycled aggregates despite persistent cost challenges.
Arcosa is well-positioned for a robust performance in 2024, supported by sustained momentum from infrastructure spending across its diverse range of businesses. With a favorable commercial landscape, the company maintains its focus on achieving operational excellence and enhancing profitability.
Arcosa, a Zacks Rank #2 stock, has gained 34.5% over the past year. ACA has seen an upward estimate revision of 0.3% for 2024 earnings over the past 30 days to $3.39 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 64.9%. It currently holds a VGM Score of B.
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 #2 stock, has gained 100.5% over the past year. BLD has seen an upward estimate revision of 0.7% for 2024 earnings over the past 30 days to $20.77 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 14.3%. It currently holds a VGM Score of B.
Masco: Headquartered in Taylor, MI, Masco manufactures, sells and installs home improvement and building products. The company is reaping the rewards of robust pricing initiatives and efficient operational strategies. Its commitment to a well-rounded capital deployment approach, prioritizing shareholder value and strategic acquisitions, further bolsters its upward trajectory. Masco's industry-leading repair and remodel-focused products across various channels, coupled with its solid balance sheet and disciplined allocation of capital, position it strongly to generate sustained shareholder value over the long term.
Masco, a Zacks Rank #2 stock, has gained 48.5% over the past year. MAS has seen an upward estimate revision of 3% for 2024 earnings over the past 30 days to $4.10 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 23.4%. It currently holds a VGM Score of A.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Masco, TopBuild, Advanced Drainage Systems, Knife River and Arcosa
For Immediate Release
Chicago, IL – February 29, 2024 – Today, Zacks Equity Research discusses Masco Corp. (MAS - Free Report) , TopBuild Corp. (BLD - Free Report) , Advanced Drainage Systems, Inc. (WMS - Free Report) , Knife River Corp. (KNF - Free Report) and Arcosa, Inc. (ACA - Free Report) .
Industry: Building Products
Link: https://www.zacks.com/commentary/2232977/5-stocks-to-buy-from-a-booming-building-products-industry
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 Masco Corp., TopBuild Corp., Advanced Drainage Systems, Inc., Knife River Corp. and Arcosa, Inc. stand to gain from increased repair and remodeling (R&R) projects, improved residential market, 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 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 29-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #16, which places it in the top 6% 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 December 2023, the industry's earnings estimates for 2024 have been revised upward to $4.62 from $4.56 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 Sector, S&P 500
The Zacks Building Products – Miscellaneous industry has outperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has rallied 48.2% compared with the broader sector's 44.4% rise. Meanwhile, the Zacks S&P 500 composite has jumped 27.5% over the same period.
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 17.7X versus the S&P 500's 20.8X and the sector's 17.5X.
Over the past five years, the industry has traded as high as 20.1X, as low as 8.5X and at a median of 14.9X.
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.
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.
Advanced Drainage Systems, a Zacks Rank #1 stock, has gained 86.2% over the past year. WMS has seen an upward estimate revision of 2.8% for fiscal 2024 earnings over the past 30 days to $5.79 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 37.1%. It currently holds a VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum.
Knife River: Headquartered in Bismarck, ND, this firm offers construction materials and contracting services throughout the United States, specializing in aggregates-based solutions. Knife River has effectively implemented its EDGE plan to enhance adjusted EBITDA margins and achieve strategic objectives. A crucial component of this strategy involves optimizing pricing to fully capture the value of core products, including aggregates, ready-mix concrete, asphalt, and contracting services.
The company has adopted a more judicious approach in selecting higher-margin projects within its contracting services division. Despite challenges, Knife River maintains a positive outlook on the long-term market strength, anticipating favorable impacts from local, state, and federal funding.
Knife River, a Zacks Rank #1 stock, has gained 105.8% since its inception on May 25, 2023, outperforming the industry's 54.1% increase. KNF has seen an upward estimate revision of 5.1% for 2024 earnings over the past 30 days to $3.50 per share. The company's earnings surpassed the Zacks Consensus Estimate in the last two reported quarters, the average being 60.5%. It currently holds a VGM Score of B.
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.
The company is benefiting from significant tailwinds in infrastructure and heavy manufacturing projects, alongside improved conditions in single-family residential construction within its operational regions. Leveraging its disciplined commercial approach, the company has successfully increased unit profitability in both natural and recycled aggregates despite persistent cost challenges.
Arcosa is well-positioned for a robust performance in 2024, supported by sustained momentum from infrastructure spending across its diverse range of businesses. With a favorable commercial landscape, the company maintains its focus on achieving operational excellence and enhancing profitability.
Arcosa, a Zacks Rank #2 stock, has gained 34.5% over the past year. ACA has seen an upward estimate revision of 0.3% for 2024 earnings over the past 30 days to $3.39 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 64.9%. It currently holds a VGM Score of B.
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 #2 stock, has gained 100.5% over the past year. BLD has seen an upward estimate revision of 0.7% for 2024 earnings over the past 30 days to $20.77 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 14.3%. It currently holds a VGM Score of B.
Masco: Headquartered in Taylor, MI, Masco manufactures, sells and installs home improvement and building products. The company is reaping the rewards of robust pricing initiatives and efficient operational strategies. Its commitment to a well-rounded capital deployment approach, prioritizing shareholder value and strategic acquisitions, further bolsters its upward trajectory. Masco's industry-leading repair and remodel-focused products across various channels, coupled with its solid balance sheet and disciplined allocation of capital, position it strongly to generate sustained shareholder value over the long term.
Masco, a Zacks Rank #2 stock, has gained 48.5% over the past year. MAS has seen an upward estimate revision of 3% for 2024 earnings over the past 30 days to $4.10 per share. The company's earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 23.4%. It currently holds a VGM Score of A.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.