At first glance, the building products industry looks like one
of easiest investment sectors to analyze. It's usually seen as a
highly cyclical industry whose fortunes are tied to construction
activity and the economy in general. That's generally true, but
investment in construction projects isn't always going to align
perfectly with economic growth. Furthermore, the industry is
subdivided between residential and non-residential construction,
private and public investment, and new-build and remodeling
activity. Growth rates can fluctuate across these divisions, so
it's essential to know what kind of exposure a stock has.
For example, large companies with building products divisions,
, have broad-based exposure to construction activity. Meanwhile,
smaller companies, such as
(cabinets and home products),
(heating and ventilation and air conditioning, or HVAC), and
Armstrong World Industries
(flooring and ceilings) will be more exposed to specific industry
drivers. It's time to look more closely at this multilayered
What is the building products industry?
The difference between building products and building
materials is a fine distinction. Generally speaking, building
products don't contain the structural elements (concrete, steel,
roofing, glass, and the like) or supporting fixtures (windows,
doors, hand-rails, and so on) used in construction. Building
products tend to be industrially mass-produced items, such as
heating, ventilation, lighting, plumbing, and flooring, that can
be used across many types of buildings.
How big is the building products industry?
The difficulty in distinguishing building materials from
products makes it hard to say just how big this industry is.
However, to give a sense of the size of the industry, here's a
chart of construction spending from the U.S. Census Bureau. Note
that at the height of the housing boom in 2006, residential
construction spending made up around 60% of total spending,
whereas the latest figure is around 38%. The housing boom truly
has gone bust.
U.S. construction spending
How does the building products industry work?
Essentially, companies in the industry generate revenue
through the sale of new products or systems, remodeling of old
systems, and servicing systems. Growth rates differ across
various sub-sectors of the industry. For example, lighting
companies such as
have growth opportunities created by technological advancements
in LED lighting, while HVAC-focused companies are more exposed to
growth in construction activity, particularly commercial and
industrial. Cabinet maker Masco is heavily exposed to new-home
building, while Armstrong World Industries' investors are hoping
the market for commercial ceilings will come back soon.
In general, a good way to follow events is to monitor the
Architectural Billings Index from the American Institute of
Architects, the benchmark indicator for the building
What are the drivers of the building products
Ultimately, GDP growth will drive investment in the industry,
but that's not the full story. For example, remodeling activity
is far less exposed to economic activity than new-build
construction is. Moreover, private sector investment is usually
more cyclical than public investment. In short, when investing in
the sector you will need to be selective about stocks so you can
capture the area of growth in the industry.
To demonstrate how this process might work, a look at the most
important recent event in the building products industry, the
housing boom of 2003-2006, could help. Here is a selection of
construction spending covering the period of time from the peak
of the housing bubble in 2006 to the middle of 2014, some eight
and a half years later:
|Type of Construction
||Spending inJanuary 2006 ($billion)
||Spending in mid-2014 ($billion)
||Change From 2006 to mid-2014
||Change From mid-2013 to mid-2014
Sources: U.S. Census Bureau, author's analysis. All figures
are at a seasonally adjusted annual rate. The fourth column
demonstrates how spending changed in the 2006 to mid-2014 period,
and the fifth shows growth year on year. .
Readers should note the diversity in the growth rates. After
more than eight years, spending in the private sector declined
24.4%, but it was up 9.2% on a yearly comparison. A similar
dynamic can be seen with the residential sector. On the contrary,
the public sector grew 3.2%, but declined 2.9% in the last year
analyzed. Meanwhile, the non-residential sector actually improved
on both measures.
This analysis of conditions in the 2006 to mid-2014 period of
time demonstrates the importance of being selective choosing
whether to invest, or
, in the building products industry. The dynamics of the building
products industry are more complicated than at first sight.
However, the sector can be very rewarding, particularly so if you
select a stock exposed to the right area of growth.
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Building Products: Investing Essentials
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