2023-08-19 01:47:09 ET
Summary
- James Hardie Industries displayed strength and resilience in a difficult market environment, with operating FCF growing by 64% and EBITDA margins expanding.
- JHX specializes in making and distributing building materials for the construction industry, with a focus on interior and exterior applications.
- The North American market is the largest for JHX, and while sales decreased due to a slowing housing market, the company still achieved record levels of EBIT and EBIT margin.
Investment Rundown
The last report from James Hardie Industries (JHX) displayed strength and resilience in a very difficult market environment. The market saw very positive results and the share price rose by nearly 15% for the day. Some of the key improvements the company posted were operating FCF growing by 64% and EBITDA margins expanding in some of the largest regions for the company, North America and Asia Pacific.
The company is bound by demand from the construction industry and how many new homes are being built. Seeing as they supply materials for them they also need to ensure they can viably pass down costs and maintain solid margins, which seems to be the case from the last report. With the FCF growing so much I think the share buyback program is soundly supported. But even without it, I think JHX will be able to drive meaningful EPS growth in the coming years. As a result, I am rating it a buy right now.
Company Segments
JHX specializes in both the making and distribution of a variety of building materials aimed at both interior and exterior construction applications. These products, which include fiber cement, fiber gypsum, and cement bonded solutions reach a lot of end markets but ultimately are included in construction and new homes, and demand here drives how much revenue and potential earnings JHX can generate.
The company's operations are organized into a few different segments for specific regions and markets. These segments are the North America Fiber Cement, Asia Pacific Fiber Cement, and Europe Building Products segments. The segments primarily are used for the exclusion and divided between the regions, as they don't necessarily offer any particularly different price of service from each other. This makes it a great way to see where demand is strong and where it might be slower instead. In the last report, it was highlighted that the slacking segment was the European, which most likely is a result of the ongoing war in Ukraine.
Looking at the growth of the company's history in taking market share I think they have made solid progress over the last few years. They have currently a 23% market share and have achieved a 13% EBIT CAGR over the last 10 years. This is impressive and had previously meant that JHX could distribute a decent dividend for its shareholders. I think this growth has been achieved though stronger sales and margin retention in regions besides its largest (North America). But I think it has been displayed that JHX is able to also push on some of the increased expenses to customers by raising prices, without risking demand to be substantially lower. However, since then the dividend has been inconsistent and there doesn't seem to be one to get excited about right now, meaning they have largely been small and not increasing, with some special dividends as well through the years. If we do see a strong recovery in the housing market and JHX continues growing FCF back to where it was in 2021 then I think a dividend is still very much on the table for investors. The operating FCF margin sat at over 25% for the quarter which is a fantastic improvement YoY.
The largest market by far in the North American one for JHX. The sales came in at $747 million, which still was a decrease of 9% which was caused by a slowing housing market in the region. This didn't stop the EBIT and EBIT margin from growing to record levels in the quarter. I think this speaks volumes about the potential that investors can still extract from the company right now. However, going into the coming quarters seeing higher volumes is important to better gauge the health of the market. None of the segments saw any increase in volumes and the one that feel the fastest was the European. I think the uncertainty that the war has brought will hover over the housing market in the region for a long time.
Risks
The construction industry has been volatile but seemingly sees a bright future around the corner, particularly concerning new housing starts. A cautious approach seems advisable still though as interest rates remain high. The company still looks positive on the future though as the housing market beings to consolidate before hopefully once again entering a phase of growth and high demand.
While the construction sector is undoubtedly facing headwinds due to uncertainty about how a recovery in new homes might look, not just in the US but also in other key markets like Europe and Asia. The war in Ukraine caused instability and many investors and construction companies became increasingly cautious about further investing. This slowdown hurt the margins and revenues for JHX but it seems the last report showed a lift up from those slumps. Besides that, higher materials costs and wage inflation are likely culprits to pressure margins going forward. The impact that inflation had on prices was quite extreme and many companies saw margins pressed, but I don't think it's unlikely some of these prices are sticky and companies like JHX will just have to adjust to higher expenses. The strong market share they have though should make them able to pass down some expenses I think.
Financials
The company remains in a good position to drive more growth I think as operating FCF has grown strongly. This has led the company to be able and make substantial AICF payments of A$137 million. Liquidity levels sit at $580 million which gives the company a leverage ratio of just 0.85. For a company in a volatile market that has to face tough challenges like rising interest rates and materials costs, being in a very low-leveraged position should help them catapult growth once the market turns around again. It is reassuring that buybacks are beginning again as $127 million was used for it. This is a strong investor incentive that should ensure the valuation stays at a slight premium.
Final Words
The last quarter was impressive from the side of JHX as they managed to grow FCF at a strong rate and achieve EBIT and EBIT margin records. The growing positive outlook on the future I do think should be taken with a grain of salt, but it seems we are finding some sort of bottom and most growth is to come from here on out. I like the performance of the company and the fact they are buying back shares aggressively in Q1 FY2024 is making me rate it a buy.
For further details see:
James Hardie Industries: Margin Expansion In Key Regions