Fund manager DNR Capital has added to its position in building materials company James Hardie Industries, arguing that the market is over-reacting to a slowdown in housing sales in the United States, where the company does a lot of its business.
James Hardie was one of a number of growth stocks that were sold off during the reporting season, when results or earnings guidance did not meet high expectations. Its stock price reached a high of $23.15 in April but since then has fallen 14 per cent to $19.80.
DNR analysts travelled to the United Sates recently, to participate in a James Hardie investor day. They found that the current recovery in the US housing cycle has been one of the slowest in history.
“Nearly nine years in, the US is still below the average mid-cycle level of 1.5 million starts,” DNR says in its Australian Equities High Conviction Fund September performance report.
Despite this, recent housing data have softened as the market becomes wary of rising interest rates and affordability concerns. There are also supply-side issues, with tighter US immigration policies putting pressure on builders’ ability to find labour and deliver homes.
“We think the market is overstating the potential valuation impact of the slowdown in house sales. Demand remains strong, driven by millennial demographics (millennials are reaching home buying age) and rising wages,” DNR says.
“We expect a longer, elongated cycle in new housing as strong demand pushes up against limited supply. Limited supply will also prompt repair and remodeling spend.”
Over half of James Hardie’s exposure in the US is the repair and remodeling sector. The company is winning share through product innovation and aggressive sales strategies, and this is likely to continue. The company will grow sales by around 12 per cent a year, based on 4 per cent market growth and market share expansion. And the company will benefit from US tax cuts.
In Asia Pacific the market is flat but the company is expanding its product range and taking market share.
James Hardie pioneered and is the world leader in fibre cement. It has 90 per cent of the fibre cement market in the US. Over the past 20 years it has grown fibre cement’s share of the US siding market from zero to 20 per cent.
It has been able to maintain EBIT margins of 20 to 25 per cent, which is world leading in building products.
DNR says the company has a well respected and longstanding chief executive Louis Gries, who has overseen a large majority of the company’s success. He retires in March next year and his replacement is jack Truong, president of the company’s international operations. Gries will remain as consultant for two years.
DNR says the company is weak on ESG. This is due to asbestos related products previously manufactured by the company. “However, we are comfortable with the fund the company established in association with the Government to compensate affected individuals,” it says.
The Australian Equities High Conviction Fund produced a return of 14.7 per cent over the 12 months to September, compared with a 13.9 per cent increase in the S&P/ASX 200 Accumulation Index.
Since the fund was launched in 2015, it has returned an average of 10.6 per cent a year, compared with growth of 8.1 per cent a year in the index over the same period.