Morningstar | Narrow-Moat James Hardie Still Compelling Despite Modest Trim to U.S. Housing Outlook; FVE Unchanged
We remain bullish on U.S. housing and expect the normalisation in residential construction activity to continue over the coming five years. However, softer than expected U.S. housing starts in 2018 have led us to modestly lower our forecasts for U.S. housing through the medium term. We now see the cyclical peak occurring in fiscal 2024 at 1.575 million total starts. While our revised cyclical peak is 25% above consensus expectations for total starts in 2018, we note is it approximately 2% below our prior forecast peak of 1.61 million starts in fiscal 2022. Correspondingly, we’ve tempered our medium-term earnings forecasts for narrow-moat James Hardie, trimming our 2019 net income forecast by 2.4%, to USD 285 million. However, our midcycle construction activity assumptions are unchanged, and we maintain our AUD 21.20 fair value estimate. Hardie continues to look compelling at current prices with shares trading at a 30% discount to fair value.Our softened medium-term outlook for U.S. housing marginally impacts our revenue forecasts for Hardie. But we still see strong growth ahead and expect a five-year sales CAGR of 11.6%, down from a previous 11.9%. With lower forecast sales, Hardie’s margins will benefit slightly less from operating leverage through the cyclical upswing. Operating margin expectations are now forecast to average 19.0% over the coming five years, down from 19.2%. Correspondingly, operating income growth will also be somewhat softer with a 5-year CAGR of 13.1% now expected, compared with a prior 13.6%. Most importantly, our midcycle assumptions for U.S. housing construction activity are unchanged. We continue to expect 1.1 million single-family starts annually at midcycle, aligning with the long-term historical average for the U.S. housing market. Therefore, our midcycle operating margin expectations for Hardie remain intact at 23.3%, slightly above the midpoint of management’s guidance of 20%-25% through the cycle.
James Hardie Industries is engaged in the manufacturing and selling of fiber cement products and systems for internal and external building construction applications in the United States, Australia, New Zealand, the Philippines and Europe. Co.'s fiber cement products are used in a number of markets, including new residential construction, manufactured housing, repair and remodeling and a variety of commercial and industrial applications. Co. manufactures numerous types of fiber cement products with a variety of patterned profiles and surface finishes for a range of applications, including external siding and soffit lining, internal linings, facades, and floor and tile underlayments.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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