Despite the macroeconomic and supply-related challenges since last year, the building materials industry is well-positioned for solid growth thanks to the surge in infrastructure projects undertaken by the government and the rising demand for residential housing. Considering these factors, the need for building essentials like roofing, insulation, glass, metals, fenestration services, etc., will remain healthy.
To that end, it could be wise to buy fundamentally strong industrial stocks Owens Corning (OC), Apogee Enterprises, Inc. (APOG), and Quanex Building Products Corporation (NX).
Before delving deeper into the fundamentals of these stocks, let's discuss the reasons behind the potential growth of the building material industry.
Building materials play a pivotal role in constructing homes. U.S. homebuilding increased 3.9% sequentially in July as lower inventory in the existing home market boosted the demand for new homes. Housing starts, a measure of new home construction, climbed to a seasonally adjusted annual rate of 1.452 million, coming higher than expectations of 1.448 million.
Apart from home construction, the building material industry also benefits from the government’s investments to improve and enhance infrastructure in order to boost the economy.
The Infrastructure Investment and Jobs Act has earmarked $550 billion for infrastructure enhancement from 2022 to 2026. This directly benefits the building material industry by augmenting the demand for construction materials, nurturing its growth.
Investors’ interest in the building material industry is evident from the Invesco Dynamic Building & Construction ETF’s (PKB) 38.8% returns year-to-date. The global construction materials market is anticipated to grow at a CAGR of 11%, reaching $3.52 trillion by 2032.
Let's take a closer look at the fundamentals of the featured stocks.
Owens Corning (OC)
OC manufactures and sells insulation, roofing, and fiberglass composite materials in the United States, Canada, Europe, Asia Pacific, Latin America, and internationally. It operates in three segments: Composites, Insulation, and Roofing.
On May 1, 2023, OC announced signing a 10-year virtual power purchase agreement (VPPA) with Shell Energy Europe B.V., effective March 9, 2023. The agreement involves three separate VPPAs for a contracted capacity of guarantees of origin corresponding to 81.9 megawatts supplying to 8 of their facilities in Europe.
Along with the two wind-driven VPPAs, this agreement would help OC use 100% renewable electricity by 2030, supporting its sustainability goals.
In terms of the trailing-12-month EBITDA margin, OC’s 23.43% is 72.1% higher than the 13.62% industry average. Likewise, its 13.62% trailing-12-month net income margin is 119.8% higher than the 6.19% industry average. Furthermore, its 9.99% trailing-12-month levered FCF margin is 84.6% higher than the 5.41% industry average.
OC’s net sales for the second quarter ended June 30, 2023, came in at $2.56 billion. The company’s adjusted earnings rose 1.6% year-over-year to $385 million. Its adjusted EPS attributable to OC common stockholders came in $4.22, representing an increase of 9.6% year-over-year. Additionally, its adjusted EBITDA increased 1.2% year-over-year to $664 million.
For the quarter ending September 30, 2023, OC’s EPS is expected to increase 7.4% year-over-year to $3.83. Its revenue for the quarter ending March 31, 2024, is expected to increase 1% year-over-year to $2.35 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 65.6% year-to-date to close the last trading session at $141.27.
OC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Value and Quality. Within the A-rated Industrial - Building Materials industry, it is ranked #7 out of 48 stocks. To see OC’s Growth, Stability, and Sentiment ratings, click here.
Apogee Enterprises, Inc. (APOG)
APOG designs and develops glass and metal products and services in the United States, Canada, and Brazil. The company operates in four segments: Architectural Framing Systems, Architectural Glass, Architectural Services, and Large-Scale Optical Technologies (LSO).
In terms of the trailing-12-month Return on Common Equity, APOG’s 28.46% is 106.1% higher than the 13.81% industry average. Likewise, its 7.26% trailing-12-month net income margin is 17.2% higher than the 6.19% industry average. Furthermore, the stock’s 1.58x trailing-12-month asset turnover ratio is 95.6% higher than the 0.81x industry average.
For the fiscal first quarter ended May 27, 2023, APOG’s net sales increased 1.4% year-over-year to $361.71 million. Its operating income rose 1.7% year-over-year to $33.77 million. The company’s gross profit increased 8.6% year-over-year to $92.99 million. Its net earnings increased 3.7% over the prior-year quarter to $23.58 million.
Its EPS came in at $1.05, representing an increase of 5% year-over-year. Additionally, its adjusted EBITDA rose 2.4% year-over-year to $43.76 million.
Street expects APOG EPS for the quarter ending August 31, 2023, to increase 7.4% year-over-year to $1.14. Its revenue for the quarter ending February 2024 is expected to increase 0.5% year-over-year to $345.86 million. It surpassed the Street EPS estimates in each of the trailing four quarters. The stock has gained 13.8% year-to-date to close the last trading session at $50.61.
APOG’s POWR Ratings are consistent with its positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Value and Momentum and a B for Quality. It is ranked #8 in the same industry. Click here to see APOG’s Growth, Stability, and Sentiment ratings.
Quanex Building Products Corporation (NX)
NX, together with its subsidiaries, provides components for the fenestration industry. The company operates through three segments: North American Fenestration, European Fenestration, and North American Cabinet Components.
In terms of the trailing-12-month levered FCF margin, NX’s 7.01% is 29.6% higher than the 5.41% industry average. Likewise, its 9.82% trailing-12-month Return on Total Capital is 44.2% higher than the 6.81% industry average. Furthermore, the stock’s 2.95% trailing-12-month Capex/Sales is 0.3% higher than the 2.94% industry average.
NX’s net sales for the second quarter ended April 30, 2023, came in at $273.54 million. Its cash provided by operating activities rose 78.7% year-over-year to $35.33 million. Its free cash flow increased 108.4% year-over-year to $27.83 million. The company’s adjusted net income came in at $21.71 million. In addition, the adjusted EPS and EBITDA came in at $0.66 and $39.90 million, respectively.
Analysts expect NX’s EPS and revenues for the quarter ending January 31, 2024, to increase 91.7% and 5.7% year-over-year to $0.35 and $276.90 million, respectively. It surpassed the consensus estimates in three of the four trailing quarters. Over the past three months, the stock has gained 34.8% to close the last trading session at $27.13.
NX’s promising outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value and Sentiment. It is ranked #9 in the Industrial - Building Materials industry. Beyond the grades mentioned, we have also rated NX for Growth, Stability, and Quality. Get all ratings here.
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OC shares were trading at $141.36 per share on Wednesday afternoon, up $0.09 (+0.06%). Year-to-date, OC has gained 68.28%, versus a 16.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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