The Zacks Building Products – Retail industry is poised to gain from the continued strong consumer demand trends for home renovation and maintenance activities amid rising interest rates and home prices. Rapid urbanization and favorable trends in the housing market are added advantages. The industry players are expected to gain from investments in digital and omni-channel capabilities for meeting demand, executing strategies, and acquisitions.
Continued innovation and e-commerce expansion, and strong demand are likely to benefit industry participants like The Home Depot Inc. (HD – Free Report) , Lowe’s Companies Inc. (LOW – Free Report) , Builders FirstSource, Inc. (BLDR – Free Report) , Beacon Roofing Supply (BECN – Free Report) and GMS Inc. (GMS – Free Report) .
About the Industry
The Zacks Building Products – Retail industry mainly comprises U.S. home improvement retailers, manufacturers of industrial and construction materials, and distributors of wallboard and ceilings systems. Some industry participants offer products and services for home decoration, repair and remodeling, and in-home delivery and installation services. A few industry players provide construction products, ranging from cement or concrete foundation materials to roofing boards and shingles. The companies also sell lumber, insulation materials, drywall, plumbing fixtures, hard-surface flooring, and lawn and garden decor products. Some players also deal in threaded fastener products, and manufactured and natural stone tiles. In addition to general consumers, the industry players cater to professional builders, sub-contractors, remodelers and retailers.
3 Trends Shaping the Future of Building Products – Retail Industry
Adherence to Home Refurbishing Activities: With rising inflation, interest rates, and increased construction costs and home prices, consumers are inclined toward renovating their homes instead of buying one. Consumers continue to invest in making homes enjoyable and comfortable. Industry experts opine that consumers’ discretionary spending on homes will continue, as interests in keeping houses well-maintained are here to stay. Revamping interiors to facilitate work-from-home and entertainment needs continues to remain a major trend. Do-it-yourself (DIY) projects for decorating and maintaining furniture and fixtures are being widely undertaken. There is a higher demand for gardening tools, as well as products related to at-home activities such as paint and tool kits. This, along with rapid urbanization, should keep aiding the top-line performances of the industry participants. Additionally, consumers are open to hiring Professional (Pro) help to complete their home renovations, resulting in rising demand for Pro projects. This is likely to aid companies in the home improvement space, with a focus on building Pro offerings.
Digitization in Focus: Retail Building Products industry participants have been witnessing a surge in online business transactions, owing to consumers’ growing digital dependency. Companies have, therefore, been bolstering their digital presence by expanding the availability of online assortments and bolstering omni-channel capabilities. Such prudent measures have been aiding the companies to meet the accelerated demand. Companies are also ramping up their delivery operations in order to provide safe and swift services, especially to Pro customers. The digital transaction boom should continue to drive the top line of key industry players.
Rising Costs: Some home improvement retailers have been incurring additional costs to provide enhanced payments and other benefits to employees amid the pandemic. A few players have been witnessing inflationary pressure across product categories, as well as higher transportation costs. Such increased costs are likely to put pressure on margins. Nevertheless, companies are adopting prudent saving measures to cushion the impacts of such costs.
Zacks Industry Rank Indicates Solid Prospects
The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #25, which places it in the top 10% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive 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. In the past year, the industry’s earnings estimates for the current fiscal year have increased 20.2%.
Given the industry’s encouraging prospects, we present a few stocks that you may want to consider buying for your portfolio. But before that, it is worth taking a look at the industry’s stock-market performance and current valuation.
Industry Vs. Broader Market
The Zacks Building Products – Retail industry has outperformed the broader Zacks Retail-Wholesale sector and the Zacks S&P 500 over the past year.
The industry declined 8.3% in the past year, whereas the broader sector declined 31.8%. Meanwhile, the S&P 500 has registered fall of 12.3% in the past year.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is the commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 14.71X compared with the S&P 500’s 16.53X. Further, the sector’s forward-12-month P/E stands at 20.69X.
Over the last five years, the industry traded as high as 23.43X and as low as 14.19X, with the median at 19.54X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
5 Building Products Stocks to Buy
Builders FirstSource: The Dallas, TX-based company manufactures and supplies building materials. The company has been benefiting from its focus on cost synergies, strategic acquisition, and robust demand from solid housing and repair and remodeling activities. Robust demand for single-family housing, R&R and other activities have been tailwinds for the company’s products and services. Builders FirstSource continues to focus on investing in innovations and enhancing digital solutions for its customers.
Acquisitions are important for Builders FirstSource’s growth strategy to supplement its organic growth and expand extensively across vast geographic boundaries. The Zacks Rank #1 (Strong Buy) company has been active on the acquisition front, which is supporting the top line. It is also focusing on cost-management practices. The stock has surged 49% in a year. The Zacks Consensus Estimate for BLDR’s current fiscal-year sales and earnings indicates growth of 9% and 18.8%, respectively, from the prior-year period’s reported figures. The consensus estimate for the current fiscal-year earnings has moved up 0.2% in the past 30 days.
Price and Consensus: BLDR
Beacon Roofing: The company is the largest publicly-traded distributor of residential and non-residential roofing materials, along with complementary building products in the United States and Canada. The company has been benefiting from strategic initiatives and the successful execution of its technology initiative in the growing e-commerce platform. The company is also on track with its Ambition 2025 targets, which emphasize operational excellence, above-market growth trajectory and accelerated stockholder value creation. Beacon has been focusing on business expansion through bolt-on acquisitions, thereby expanding its reach.
Beacon is expanding its digital platform in value-added ways. It remains on track with the long-term target of generating $1 billion in annual digital sales. Disciplined pricing in a volatile, supply-constrained marketplace, and effective and timely sourcing have been aiding margins. Cost-saving efforts and productivity initiatives are expected to go a long way in bringing down the Zacks Rank #1 company’s operating expenses, thereby driving margins. The stock has risen 3.4% in a year. The Zacks Consensus Estimate for BECN’s current fiscal-year sales and earnings indicates growth of 23.5% and 36.2%, respectively. The consensus estimate for current fiscal-year earnings has been unchanged in the past 30 days.
Price and Consensus: BECN
Home Depot: The Atlanta, GA-based company is the world’s largest home improvement specialty retailer, based on net sales. Home Depot has been benefiting from strong demand for home-improvement projects, robust housing market trends and ongoing investments. Continued strength in both Pro and DIY categories, and digital momentum have been key drivers. Its interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters, aiding digital sales.
Home Depot is witnessing significant benefits from the execution of its One Home Depot plan, which focuses on expanding the supply chain, technology investments and digital enhancements. The Zacks Rank #2 (Buy) company has created the fastest, most efficient delivery network in home improvement through options like buy online pick up in store with convenient pickup lockers, buy online deliver from store with express car and van delivery, and curbside pickup. The HD stock has declined 10.7% in a year. The Zacks Consensus Estimate for its current fiscal-year sales and earnings indicate growth of 3.1% and 6.1%, respectively. The consensus estimate for current fiscal-year earnings has been unchanged in the past 30 days.
Price and Consensus: HD
Lowe’s Companies: The Mooresville, NC-based leading home improvements retailer has been gaining from strong growth in its Pro business. The company has been enhancing the experience of its pro customers by upgrading pro-focused brands and revamping the pro-service business website. The company also remains well-positioned to capitalize on the demand for the home improvement market, backed by investments in the technology and merchandise category. Gains from the Total Home strategy and the execution of the Perpetual Productivity Improvement initiative are likely to drive the company’s results in the near and long terms. The Total Home strategy has been resonating well with Pro and DIY customers for a while.
Lowe’s has been progressing well with advancements in the digital channel. The company is investing in enhancing omni-channel retailing capabilities. Management is also committed to enhancing the Pro offerings, expanding the company’s market share and driving the operating margin. Shares of the Zacks Rank #2 company have declined 6.1% in a year. The Zacks Consensus Estimate for its current fiscal year’s sales and earnings indicates growth of 1.7% and 12.2%, respectively. The consensus estimate for current fiscal-year earnings has improved 0.1% in the past 30 days.
Price and Consensus: LOW
GMS: The Tucker, GA-based leading North American specialty building product distributor has been gaining from the robust customer service in a solid residential market, coupled with an inflationary pricing environment and successful platform expansion activities. Inflationary pricing, healthy residential end markets, strong performance from complementary products and the recent acquisitions have been sales drivers for GMS.
The Zacks Rank #2 company has risen 1.3% in a year. The Zacks Consensus Estimate for GMS’ current fiscal year’s sales and earnings indicates growth of 8.7% and 2.8%, respectively. The consensus estimate for current fiscal-year earnings has moved up 7.1% in the past 30 days.
Price and Consensus: GMS