On May 17, we downgraded our recommendation on manufacturers
of metal products for the North American non-residential
NCI Building Systems Inc.
) from Neutral to Underperform. The downgrade followed its
wider-than-expected loss of the first quarter and its
announcement of an expected second quarter loss as well as other
concerns like volatility of steel prices, dependence on few steel
suppliers, and uncertainty regarding sequestration.
Why the Downgrade?
NCI Building reported loss per share of 19 cents in the first
quarter of 2013 due to severe weather conditions, product mix,
additional costs for the ramp-up of the Middletown coatings
plant, and additional training required for employees.
NCI Building has provided preliminary results for the second
quarter of fiscal 2013 (ending Apr 28, 2013). Even though
revenues are expected to be up 17% year over year to
approximately $293 million, adjusted EBITDA is projected to be in
the range of $10 million to $11 million. This is expected to lead
to a per share loss for the quarter.
NCI Building recognized additional expense in the first quarter
to train skilled manufacturing workers (such as welders) and
expects to do the same in the second quarter of fiscal 2013 as
well, affecting margins. Furthermore, sequestration uncertainty
remains an overhang.
One of the important raw materials for NCI Building is steel and
it is considerably influenced by steel prices. The steel industry
is cyclical in nature and steel prices remained highly volatile
in recent years. The prices may remain volatile in future causing
For the first quarter of fiscal 2013, steel accounted for 70% of
its cost of sales and a 1% change in the cost of
steel would have led to a pre-tax impact on cost of sales
of approximately $1.7 million, had such costs not been passed on
to the customers. Given the competitive environment and the costs
of other alternative building products, it could restrict the
company's ability to pass on these higher costs. Furthermore,
reliance on a few steel suppliers could make NCI Building more
vulnerable to supply disruptions.
Other Stocks to Consider
Other stocks to consider in the same industry with a favorable
Zacks Rank are
Chicago Bridge & Iron Company N.V.
James Hardie Industries plc
) all of which carry a Zacks Rank#2 (Buy).
CHICAGO BRIDGE (CBI): Free Stock Analysis
JAMES HARDI-ADR (JHX): Free Stock Analysis
NCI BLDG SYSTEM (NCS): Free Stock Analysis
PGT INC (PGTI): Free Stock Analysis Report
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