Hardie's American turnaround gathers pace

After Treasury Wine Estates and Orica last week, any mention of earnings revisions this late in the confession season tends to set hearts aflutter.

Building materials group James Hardie, the Australian listed, Irish domiciled operation with the bulk of its earnings in the US, managed to allay investors’ worst fears this morning with an update that on balance was an upgrade.

Its American division was setting a cracking pace, helping offset a sluggish Australian operation that appeared to be marking time. So much so that it would be adding capacity to its US housing business.

While it is not the archetypical currency play on a weakening Aussie dollar – given it reports in US dollars with a large proportion of Australian currency earnings – its exposure to the recovering American economy is a portend of what many hope will be a trend.

Earnings to revenue margins in the US are expected to lift in 2014 while sales revenue growth is outpacing the lift in organisational spend.

The American housing market has been in recovery for the best part of a year with prices now 15% up on a year ago and 30% up from the depths of the housing market crash that sparked the global financial crisis.

In large part, that has been driven by persistent low interest rates that have allowed the huge stock of excess American housing to be reabsorbed and finally encouraged new development.

Much of the American recovery already has been priced into Hardie which is trading at almost 25 times 2014 earnings; its biggest drawback apart from its asbestos liability and the reputational damage that caused the company.

Hardie has the greatest exposure to new housing starts. On a revenue base, 53% of its earnings are exposed to new housing with the bulk of that (34%) in the rapidly recovering US market.

On an earnings before interest and tax basis, that exposure jumps to 66%, where its leverage to US housing starts stands at a whopping 46%.

Hardie currently is firing on only two cylinders. At some stage, the Australian housing market will respond to the record low interest rates (see our latest video on housing). When that happens, the company will find itself in expansion on both sides of the Pacific.