James Hardie Industries
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The US housing crisis is over. Or at least the numbers are leaning that way: in calendar 2012, single family house building permits rose 24%. It’s good news for James Hardie, and it explains why the stock has risen 28% since our Building materials roundup on 21 Jan 10 (Avoid – $7.84).
The underlying appeal of the company’s main product – fibre cement – is reflected in the performance of its Asia-Pacific business, where sales rose 69% between 2007 and 2012 while operating margins rose from 16% to 21%.
The region's performance helped cushion the impact from the US and Europe, where sales fell 32% over the same period. With US housing starts improving, James Hardie has decided to re-open an American manufacturing plant it mothballed in 2008. Higher demand means management expects the divisional operating margin to rise above 20% over the next 12 months (it was closer to 30% during the boom).
| Sell | Reassess |
|---|---|
| Above $7 | Below $7 |
James Hardie's asbestos liabilities will remain a cloud over the company, but it appears determined to be a better corporate citizen and its underlying business is attractive, so we'd be interested in owning the stock if we could get a decent margin of safety. But the current price already factors in a significant recovery in earnings, with a price-earnings ratio in the high teens based on earnings per share of 55 cents forecast for the year to March 2015, which itself is about 70% higher than the underlying EPS of 32 cents forecast for the year just finished.
We'd reassess the stock at prices below about $7, but above that we recommend you SELL.
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