Analysts In Love With James Hardie, Yet Again

This story features JAMES HARDIE INDUSTRIES PLC. For more info SHARE ANALYSIS: JHX

James Hardie's upside Q1 surprise has rekindled analysts affection for what is often labeled 'probably the highest quality cyclical listed on the ASX'.

-Net profit for 1Q jumps 13% to US$174.5m
-Most brokers rate stock as outperform, with target prices over $50
-Recovery in US housing to support gains
-Rising mortgage rates remain a key risk

By Nicki Bourlioufas

Analysts surprised by expansion in margins

Most brokers expect James Hardie ((JHX)) to maintain strong earnings momentum and outperform other building materials companies, with its US business expected to drive strong earnings growth as the housing market defies forecasts of economic recession.

James Hardie, the world’s largest manufacturer of fibre cement products, posted an adjusted net profit for the three months to June 30 of US$174.5m, up 13% from the year-earlier period.

Analysts were surprised by the company’s net income guidance of US$170m to US$190m for the second quarter, reflecting strong earnings expectations from the US operations which account for around 75% of group earnings.

While first-quarter sales dropped -5% to US$954.3m, most brokers said the strong market position in the US construction market, expanding margins, and an expected upswing in housing construction in the US and Australia will support ongoing earnings growth.

Analysts were surprised by the significant expansion in margins and lower-than-expected costs.

Jarden expects wider margins to be sustained and predicts average EBIT margins of 30% for the North American operations and 28.5% for the Asia Pacific business over the forecast period to 2026. Notably, lower production and distribution costs helped margins, including lower freight and pulp costs.

One of the most upbeat brokers is Morgan Stanley which says James Hardie is the “highest-quality” name it covers in the building materials sector.

Its strong market position, “best-in-class” margins and cyclical upside to a recovery in US housing are seen as providing support for ongoing gains in the company's share price. Morgan Stanley has boosted its price target on the stock by 16% to $54.

Citi analyst Samuel Seow has also significantly upgraded his target price to $55.10 from $42.50.

Citi expects US earnings will remain robust with activity and lead indicators in US housing and house prices looking positive, and the company's significant market share also supporting earnings.

Seow has maintained his Buy rating with the company’s “multiple still trading below historical levels”.

Goldman Sachs has lifted its FY24 earnings estimates by 15%, largely driven by the strong performance of the company’s North America segment, greater-than-expected sales volumes and profit, and lower-than-expected costs.

This broker has a Buy rating on the stock and a price target of $51.70.

UBS analyst Lee Power also has a Buy rating with a price target of $49.50, but he notes any potential slowdown in the US housing recovery remains a key risk as mortgage interest rates climb.

Evans and Partners increased its valuation to $50 and upgraded full-year group net profits to US$642m from US$566m.

This broker notes the company's profitability should be supported by a continued downward pressure on costs, which will continue to support healthy profit margins.

Morgan Stanley too says costs are likely to continue to moderate in a slowing macro environment and has upgraded FY24 EBIT forecast by 23% to US$892m.

Jarden lifted its 12-month target price to $48.60 from $39.70 with an Overweight rating, following double-digit earnings upgrades, stating James Hardie remains its preferred building materials exposure.

Key downside risks are identified as economic uncertainty and rising interest rates leading to weaker-than-expected housing construction activity.

Macquarie (Outperform) raised its target price to $52.20 from $48.00, largely underpinned by a strong volume outlook for the US business.

Macquarie says 2Q guidance of US$170m to US$190m “is materially ahead of what we, and the street were expecting.” But like other brokers, it is closely monitoring mortgage interest rates and (any) impact on construction activity.

James Hardie has been a strong performer in 2023, its shares rising circa 70% year to date when the ASX200 has hardly advanced at all, ex dividends.

FNArena's consensus target price for James Hardie is $51.66, suggesting circa 17.8% upside to the last share price of $43.86.

Evans and Partners, Jarden and Goldman Sachs are not included in FNArena's daily monitoring through the Australian Broker Call Report.

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