Near-Term Outlook for Retail Building Products Industry Drab

The Building Products - Retail industry covers a broad range of groups including home improvement retailers, manufactures of industrial and construction materials and distributors of wallboard and ceilings systems. Also, the industry comprises players offering products and services for home decoration, repair and remodeling.

Players belonging to this industry group offer everything from cement or concrete foundation materials to roofing boards and shingles. These sell lumber, insulation materials, drywall, plumbing fixtures, flooring, lawn and garden and decor products. Some players also deal in threaded fastener products as well as manufactured and natural stone tiles. These companies mainly sell products to professional homebuilders, sub-contractors, remodelers and consumers.

Let's have a look at the industry's three major themes:

  • The U.S. housing market has been volatile, thanks to rising mortgage rates, which are inducing home price inflation and making purchases expensive. Lack of affordable homes, skilled labor shortages, lower inventory and a dearth of residential lots might act as deterrents to the space. Per the Commerce Department, U.S. new home sales declined 8.9% in October 2018, reaching its lowest level in more than two and a half years. Home sales have been plunging this year due to drops in major markets.

  • Strained margin has been a key concern for many players in the Building Products - Retail space. Stiff competition coupled with higher selling, general and administrative expenses and an unfavorable customer/product mix are dampening the margin. Rise in commodity or raw material costs, supply chain and transportation expenses, and higher cost of investments for technological advancements can be persistent deterrents in the future.

  • The building products industry, like most industries, is evolving as companies focus on digitalization. Digital-savvy customers are increasingly resorting to online apps for home shopping. As a result, companies are resorting to well-chalked strategies to connect offline and online channels, including higher customer engagement and supply-chain access to bolster growth. These retailers are embracing a completely integrated digital platform to cater to the needs of online shoppers'. Additionally, a healthy economy might provide an impetus to the U.S. housing market.

Zacks Industry Rank Indicates Gloomy Prospects

The Building Products - Retail industry is housed within the broader Zacks Retail-Wholesale sector. It carries a Zacks Industry Rank #162, which places it at the bottom 37% of more than 250 Zacks industries.

The group's Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group's earnings growth potential. However, the industry's earnings estimate for the current year inched up about 1% over the course of a year.

Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Lags in Terms of Shareholder Returns

The Zacks Building Products - Retail Industry has underperformed the broader Retail-Wholesale Sector as well as the S&P 500 index over the past year.

While the stocks in this industry have collectively lost 12%, the Zacks S&P 500 Composite and Zacks Retail-Wholesale Sector have declined 8.2% and 7.8%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, a commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 15.08X compared with the S&P 500's 14.54X. However, the industry's valuation compares favorably with the sector's forward-12-month P/E of 19.45X.

Over the last five years, the industry has traded as high as 26.85X, as low as 17.85X and at the median of 23.21X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Improving economic backdrop along with higher home prices might change the scenario for the Building Products - Retail industry in the long term. However, decline in U.S. home sales coupled with an unimpressive Zacks Rank raises concerns for the near term. Also, apprehensions related to a fourth rate hike by Fed might make things difficult, resulting in slowdown of housing activities.

While none of the stocks in the Zacks Building Products - Retail space currently sports a Zacks Rank #1 (Strong Buy), here we present two stocks with a Zacks Rank #2 (Buy). Additionally, we suggest another two stocks with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today's Zacks #1 Rank stocks here .

Let's have a look at those chosen stocks:

Fastenal Company (FAST): This Winona, MN-based wholesale distributor of industrial and construction products has gained 2.7% in the past six months. The Zacks Consensus Estimate for earnings in the current fiscal year has been revised 0.4% upward in the last seven days. Further, the stock has a Zacks Rank of 2.

Price and Consensus: FAST

Tecnoglass Inc. (TGLS): This manufacturer and seller of architectural glass, windows and related aluminum products is also a Zacks #2 Ranked stock. Shares of the company have increased 10.4% in a year. Moreover, the Zacks Consensus Estimate for earnings in the current year has moved 13.6% north in the last 60 days.

Price and Consensus: TGLS

The Home Depot, Inc. (HD): The consensus estimate for earnings with regard to this Atlanta, GA-based company has moved nearly 2.4% up for the current fiscal year in the last 60 days. This leading home improvement retailer has a Zacks Rank of 3.

Price and Consensus: HD

Lowe's Companies, Inc. (LOW): This Mooresville, NC-based company is a Zacks #3 Ranked stock. The Zacks Consensus Estimate for earnings in the current fiscal year has remained stable in the last 30 days.

Price and Consensus: LOW

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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