Two Values in Residential Construction Products

09/04/2019 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

We've uncovered two stocks that we consider timely value plays; both ideas are in the residential home construction market, notes Richard Moroney, editor of the small-cap focused Upside.

A leading supplier of building materials to the residential construction market, BMC (BMCH) sells millwork, doors, and whole-house framing solutions, which save builders time and expense.

The company also offers design and installation services. Serving national and regional builders, BMC operates in 19 states, focusing on fastgrowing markets in Texas, California, and Georgia.

BMC earns the maximum Quadrix Overall score of 100, aided by an 83 in Value. At 12 times trailing earnings, the stock trades 37% below its five-year norm and 12% below its peer-group median of 14.

Unfavorable lumber prices and lower profit margins are expected to impact full-year results. In 2018, lumber and lumber sheet accounted for 35% of revenue.

For 2019, sales are expected to dip 3%, with per-share earnings down 9% to $1.81. But that figure has jumped $0.16 over the past month. For 2020, per-share earnings are expected to climb 6% to $1.91. We are starting BMC with a Buy rating.

Falling mortgage rates and pent-up demand for new homes bode well for Installed Building Products (IBP), one of the largest national installers of insulation.

Through a network of more than 175 branches in 48 states, the company sells building products, including garage doors, closet shelving, and gutters. Founded in 1977, Installed Building Products uses acquisitions — more than 140 since 1999 — to expand its footprint and build scale.

The stock earns a 94 Overall score. The stock has surged 61% so far this year, a spurt that has pushed the trailing P/E up to 19. But the rally has coincided with strong operating results and an improved profit-growth outlook, reflecting favorable pricing, higher volumes, and improved cross-selling.

For 2020, analysts project sales growth of 11% and per-share earnings of $3.10. Over the past month, the profit consensus has trended upward and implies 16% growth. Per-share earnings are expected to climb 12% next year. Installed Building Products is rated a Buy.

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