Quadrix Buys in Building

08/18/2016 8:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

In the latest issue of his small cap focused newsletter, Upside, quantitative analyst Richard Moroney looks at two new picks with bright outlooks — both in the building sector.

Apogee Enterprises (APOG) offers an attractive play on the growing construction market. Its glass unit makes custom window and wall systems comprising the outside skin of commercial and residential buildings.

About 94% of annual sales are in the US, with the remainder in Brazil and Canada.

Key growth drivers include government mandates for better energy efficiency, improved hotel occupancy rates, lower office vacancies, and improved retrofit activity.

Apogee earns a Quadrix Overall score of 98, versus an average of 76 for the 36 stocks in its industry group. Quadrix is our proprietary quantitative ranking system.

Apogee delivered strong May-quarter results. Per-share earnings surged 48. Revenue rose 3%. The order backlog increased 8% to $510 million.

For fiscal 2017 ending February, management raised its per-share profit outlook to $2.70 to $2.85, up from a prior range of $2.65 to $2.80. The midpoint of $2.77 implies 25% growth.

Apogee shares trade at 19 times trailing earnings, 18% below their 10-year average and 23% below the median for building-products stocks in the S&P 1500 Index. Apogee is being initiated as a Buy.

Founded in 1957, KB Home (KBH) operates in seven states and targets first-time and first-trade-up home buyers.

The company is benefiting from a favorable combination of low interest rates, rising employment, and pent-up demand from younger home buyers.

In the May quarter, KB’s per-share earnings surged 70% and topped the consensus by 21%. Housing deliveries increased 30%; average selling prices rose 2%; and the order backlog jumped 14% to $1.8 billion.

KB earns an impressive Overall score of 98, supported by ranks above 80 in five of the six categories.

KB shares have rallied 34% so far in 2016, well ahead of the average of 11% for homebuilders in Quadrix. Yet the estimated current-year P/E of 13 is 16% below its peers.

Profit estimates for both 2016 and 2017 have risen over the past 90 days. Current-year earnings per share are projected to surge 58% to $1.34.

If KB meets the consensus and its P/E ratio holds at 17, shares would rally to $23, up 35%. While that figure seems optimistic, shares seem capable of climbing 20% in the year ahead. KB is being initiated as a Buy.

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By Richard Moroney, Quantitative Analyst at Upside

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