Australia | Oct 11 2006
By Rudi Filapek-Vandyck
“Demand is static at challenging levels across previously hot markets. Recent resilient markets now show signs of weakening. The downward trend continues.”
In case you were wondering, those three opening sentences all refer to the US housing markets. Credit Suisse published its US Proprietary Survey for September yesterday and, just to make sure we all speak the same language when it comes to prospects for the likes of Boral (BLD), James Hardie (JHX) and Rinker (RIN), CS analysts for the building materials sector in Australia spelled it out for investors this morning: no relief in sight from the US housing downturn, earnings risks are still to the downside.
Credit Suisse’s US housing forecasts currently reflect a harder US landing lies ahead. The broker forecasts 1.9m starts in FY07, 1.7m in FY08 and 1.6m in FY09. Year to date figures so far imply annualised starts of approximately 1.7m. CS experts believe that over the next 12 to18 months, annualised levels of approximately 1.5m-1.6m should not be ruled out.
With regards to the market situation in Florida (important, as the state represents circa 44% of total group revenues for Rinker) the experts see the downturn worsening before improving again.
What all this boils down to, according to CS, is that headwinds are likely to remain for stocks such as Boral, James Hardie and Rinker. The building materials analysts seem to suggest that further earnings downgrades by up to 10% are not impossible.
Having said that, they also believe each of those three stocks represent excellent longer term opportunities as none of the stocks is seen trading at fair value at the moment.
With regards to Boral, the analysts note the shares have historically traded between 10x and 12x projected earnings. This would imply a share price trading range of $6.30 to $7.60. Boral shares closed at $7.45 yesterday which would seem to confirm the thesis. However, Credit Suisse analysts would argue the stock deserves a P/E re-rating through the cycle “given its exposure to structural change (evidenced by greater price and inventory management), diversified earnings base, stronger free cashflow and resultant balance sheet”.
The stock is currently rated Neutral with a twelve month price target of $7.85. Five out of the nine other leading experts monitored by FN Arena rate the stock as Neutral as well. Two brokers have it on Buy, one on Sell. JP Morgan recently ceased coverage.
James Hardie is rated Outperform by CS with a price target of $10.00 as the stock is seen as cheaply priced because of the lingering asbestos issues. Were management to announce an asbestos resolution tomorrow, a material re-rating of the shares would likely follow, the analysts argue. The others seem to agree with seven Buys and two Neutral ratings generated by the remaining nine leading equity experts monitored by FN Arena.
For Rinker the short term outlook is for more downgrades to earnings forecasts, the analysts suggest. They add fundamental value in the stock remains “obvious” but at the same time this value is seen as “increasingly less compelling in the absence of material cost saves, buyback activity and/or corporate take over appeal”.
A further 10% reduction in the broker’s FY07 US housing starts assumptions (this would translate into circa 1.7m starts) would reduce the analysts’ current EPS estimates by a further 4.4%. All things being equal, CS’s sum-of-the-parts valuation would fall by around 65cps to $15.05.
Credit Suisse rates Rinker Outperform with a price target of $17.00. JP Morgan still tops the market with an Overweight call and a price target of $21.03. Rinker currently enjoys five more Buys, two Neutrals and one Sell recommendation.