James Hardie is an Australian manufacturer and global leader in fibre-reinforced cement. The business has been operating for 125 years producing products used in new residential construction, manufactured housing, repair & remodelling and other applications. Whether you believe that President Trump can achieve greater GDP growth or not, US housing should continue to recover from historically depressed levels. Despite rising steadily over the last few years, housing starts remain 20% below a midpoint of historic housing activity. With more than 70% of the company’s business exposed to US housing and its strong market position, James Hardie will continue to benefit from the normalisation in the US housing sector.
While most forecast a gradually improving trend to the level of housing starts, conditions exist that suggest this may be conservative. These include rising house prices, full US employment, and existing home supply hitting a 24 year low. Additionally, in the last quarter of 2016, net equity extraction from mortgages was positive in for the first time since 2008, which is positive for the US economy.
Recent earnings updates from James Hardie have been somewhat underwhelming, having reduced FY17 estimates for the third time as they invest to expand capacity after running production capabilities too tight. This is a relatively short term issue as they optimise throughput of the new plants and set the business up well for FY18 and beyond. The company continues to experience strong organic top line revenue growth driven by increasing market share and underlying market growth.
With this backdrop, we believe the outlook for James Hardie remains strong, and the company is capable of delivering greater than 50% return to shareholders as the US housing market continues to recover.
Contributed by Nick Reddaway, Managing Director at Paragon Funds: (VIEW LINK)