JHX - James Hardie Industries: Strategy And Market Share Gains Keep Us Bullish

2023-11-15 00:05:43 ET

Summary

• James Hardie Industries is outperforming construction materials stocks and the broader homebuilders industry.
• The company is experiencing strong demand for its low-maintenance and sustainable fiber cement siding products.
• Despite volatile housing market conditions, JHX continues to gain market share globally and achieved record profitability in its latest quarterly results.
• We are bullish on the stock and expect a rally higher through 2024.

James Hardie Industries ( JHX ) has outperformed construction materials and homebuilders stocks, with shares up more than 70% in 2023. The company is seeing strong demand for its low-maintenance, and sustainable high-performance fiber cement siding, backerboard, and gypsum-based products.

Despite volatile housing market conditions, the idea here is that James Hardie continues to gain market share against more traditional building materials worldwide. Indeed, that was the message from management in its latest quarterly results, where the company reached record profitability.

We are bullish on JHX which is well-supported by solid fundamentals and a positive outlook. We see room for shares to climb higher through 2024.

JHX Earnings Recap

JHX reported its fiscal 2024 Q2 EPS of $0.41, up 3% from $0.39 in Q2 fiscal 2023. Net sales of $999 million, ticked higher compared to $998 million in the period last year.

The big story here is that despite lower volumes globally, including a -5% decline in the core North America region and -15% from Europe, higher average pricing helped drive profitability.

The adjusted EBITDA margin at 28.6% was up from 26.2% last year, also capturing lower freight and pulp costs amid easing inflationary and supply chain pressures. Total adjusted EBITDA is up 11% over the first six months of the year while operating cash flows surged by 74% to reach $459 million.

On the balance sheet, the company ended the quarter with a leverage ratio of 0.8x including $608 million in liquidity. JHX has also been active with share buybacks, repurchasing $200 million in stock over the past year, while also announcing an extension of the authorization to $250 million effective through October 2024.

In terms of guidance, management is recognizing the market between US single-family and multi-family home construction remains "unsettled", with an ongoing slowdown although some revisions higher to forecasts in recent months. Nevertheless, for the current Q3, the company sees a continuation of the recent trends with stable margins sequentially and a volume forecast essentially flat from Q2.

The understanding is that even with challenging macro considering interest rate at two-decade high, overall economic conditions remained defined by resiliency. Trends in Europe and APAC are similar, with the difference internationally being some greater success by James Hardie to push average pricing higher compared to North America.

What's Next For JHX?

What we like about James Hardie is the sense that the market trends and industry best practices have sort of moved in the company's direction. The durability of the engineered products often represents a modern architectural look consumers are demanding while offering cost advantages for builders looking to construct properties with pre-finished materials.

There is a recognition that fiber cement siding, for example, offers a cost advantage compared to "metallic" or natural wood products while also being low maintenance and superior even fire-resistance.

The tailwind here is for the company to continue gaining market share while expanding into new categories as a new growth opportunity. So even as the "pie" of global construction activity has slowed, the bullish case for JHX is that the company is capturing a larger slice at the margin evident by the volume trends.

According to consensus, JHX is expected to reach $3.9 billion in revenue this year while EPS climbs by 13% to $15.54. Into fiscal 2025, the expectation is for top-line growth of around 7% and earnings to also trend higher.

We believe these estimates are reasonable, with room for JHX to even outperform. The valuation with JHX trading at a 19x forward P/E multiple is attractive in our opinion considering the company's leadership position, and strong fundamentals.

Final Thoughts

JHX is a high-quality company with the Q2 update highlighting impressive strategic and financial execution. With the stock currently breaking out to its highest level since early 2022, the latest trends may have opened a door to reclaim the all-time high. We rate shares as a buy with a price target of $40.00 representing a ~24x multiple on the current year consensus EPS.

In the context of the latest macro developments, an outlook for lower interest rates as inflationary pressures ease, but provide some support for the broader housing market in the U.S. as a tailwind for trends over the next several quarters.

On the other hand, the risk here is that macro conditions deteriorate leading to weaker-than-expected results. The possibility that the housing market slows significantly further would likely pressure demand and undermine the earnings outlook. Into 2024 include trends in volume as well as the operating margin as key monitoring points.

For further details see: