A solid economy, a healthy housing industry, strong cement prices and cost-containing efforts are expected to generally drive up earnings in the building products industry above 1996 levels, although weak prices in insulation and siding will hurt a few companies.
The so-called “goldilocks” economy–featuring modestly solid growth, low interest rates and moderate to low inflation–has been good to the industry’s end markets, residential and commercial construction and refurbishing work. “This economy is pretty close to ideal, as far as building product companies are concerned,” said Merrill Lynch & Co. analyst Jonathan Goldfarb.
He added that cost-containment and lower spending for raw materials should also help earnings.
Masco Corp.’s third-quarter results will be helped by acquisitions and the strength of its faucets and kitchen cabinet lines. Analyst Peter Dannenbaum, of Morgan Stanley Dean Witter, said purchases of Texwood Industries Inc., a kitchen and bath cabinetry manufacturer, and Franklin Brass Manufacturing Co., a bath accessory maker, will help Masco. Consensus estimates see the company posting net income of 60 cents a share, over the 51 cents it earned a year ago.
USG Corp. and Centex Construction Products Inc. will get a boost from strong pricing in gypsum wallboard, said Arnhold & S. Bleichroeder Inc. analyst Barbara Allen. Analysts see USG’s third-quarter earnings at $1.51 a share, compared with $1.15 a year ago, while Centex is projected to earn 69 cents a share for its second quarter, compared with 59 cents in 1996.
Earnings at Shaw Industries Inc., a carpeting and rug manufacturer, will be aided by improving housing resales and healthy levels of remodeling work, Allen said. Market watchers see the company earning 20 cents a share for the third quarter, compared with 18 cents a year ago.
Earnings growth at cement companies will be fueled by strong pricing, as the industry continues to recover from the weakness of the 1980s.
Prices began to recover after the recession of the early 1990s, following a strong effort on the part of domestic cement producers and labor unions to obtain tariffs against foreign producers, mainly from Japan and Mexico. Spending in roads and highways has also propped up demand.
Beneficiaries will include Southdown Inc., Giant Cement Holding Inc., Lafarge Corp. and Medusa Corp. All of these are expected to show strong year-over-year performances.
Among these companies, Wall Street sees third-quarter earnings at $1.20 a share at Southdown, compared with $1.09 a year ago, and at $1.41 a share at Medusa, compared with $1.27 in 1996.
Southdown will also benefit from its ability to expand capacity at its plants, said Rauscher Pierce Refsnes Inc. analyst David Lee Smith. The added capacity enabled Southdown to take advantage of the healthy demand. Morgan Stanley’s Peter Dannenbaum sees cement pricing at Southdown up more than $4 per ton over the $63-per-ton level of the third quarter of 1996.
The only wrinkle in cement earnings will be the mild weather of the past winter, which pushed some projects originally scheduled for the third quarter to the first half of the year. Lafarge and Medusa may be among those affected, said Dannenbaum.
Consensus estimates put Giant Cement’s third-quarter earnings at 66 cents a share, compared with 52 cents a year ago. Analysts see Lafarge’s third-quarter earnings at $1.34 a share, compared with $1.21 in 1996.
While strong pricing will help the bottom lines of cement producers, other building product manufacturers will be hurt by weak pricing in their industries. Insulation and siding have been shaky lately, and this will affect Owens Corning and ABT Building Products Corp., said SBC Warburg Dillon Read Inc. analyst John Stanley.
Owens Corning and ABT have already sent warnings of the impact of the lower prices. In early August, ABT cut its prices on exterior hardboard siding as a response to aggressive pricing on fiber cement siding by Australian building materials manufacturer James Hardie Industries Ltd. Owens Corning has said its earnings will be affected by pricing pressures in its insulation business and delayed improvements in composites pricing.
Owens Corning’s earnings are estimated at 92 cents a share, compared with $1.44 a year ago. ABT is seen earning 46 cents a share, compared with 60 cents in 1996.
At Armstrong World Industries Inc., earnings for the third quarter will be squeezed by poor results expected at its 37 percent-owned Dal-Tile International Inc. unit.
Dal-Tile cautioned analysts it expects to report a pretax loss for the third quarter of about $12 million, or 22 cents a share, excluding a charge to be recorded in the same period. The company blamed the poor results on higher manufacturing and transportation costs, and increases in selling, general and administrative expenses. As a result, Armstrong is expected to earn $1.44 a share for the third quarter, below last year’s $1.59 a share.
Johns Manville Corp. expects pricing pressure in its residential insulation and engineered products businesses to impact third-quarter earnings. Current estimates see the company earning 21 cents a share for the third quarter, flat with 1996 levels.
Looking into the future, market watchers expect the favorable trends helping the industry to continue. New home construction should remain steady, and with the average house over 20 years old, remodeling and refurbishing work will also stay strong, analysts said.
