Valuation of the building materials industry

Weekly Corporate Growth Report, Jun 16, 1997

Over the past several years, firms in the Building Materials industry have switched their emphasis to the repair and remodeling business. These days, all but a few companies in this group generate a majority of their revenues from this market This change is serving to mitigate the cyclical swings of the new construction and housing markets. Some of these companies have also gained a larger market share by selling through national home-center chains.

In 1996, existing home sales reached a record 4.09 million, topping the previous high of 3.99 million, which had been set way back in 1978. This is expected to stimulate demand for products produced by the companies in this industry for the next several years.

Most homeowners perform work on their resale homes within two years of purchase. For every $100,000 of property value, owners on average spend $1,035 each year on routine repair and maintenance. Even more, 85% of the US housing stock was built before 1980, and therefore, many of these homes need some repair.

Fortunately for this industry, the housing market is continuing to show signs of strength. The recent quarter-point interest hike is not expected to hurt housing starts much since mortgage rates are still historically low and consumer spending and confidence levels remain high. On the other hand, any future interest rate increases would probably cut into the earnings of many of the companies in this niche.

Commercial Buildings

Commercial construction is showing signs of life. Despite rents that have gone up in the last five years, office vacancy rates have declined. This makes it attractive for developers to begin construction. However, most new construction will probably be held off until the Federal Reserve's plan becomes clearer.

Still, Value Line feels that the glut of office space that was a result of overbuilding during the 1980's has been filled and there is now a demand for new space.

Building Materials companies that are a part of this new construction will likely be able to post decent earnings, in spite of the potential rising interest rate environment. Most companies in this industry have lowered their debt levels, restructured operations, cut costs and improved their cash positions since the recession that occurred during the early 1990's This should help companies to brave a downturn and bounce back from it more quickly.