James Hardie Fighting Worsening Markets

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This story features JAMES HARDIE INDUSTRIES PLC.
For more info SHARE ANALYSIS: JHX
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

James Hardie ((JHX)) delivered a strong second quarter profit result, but as JP Morgan points out, the company’s biggest problem is conditions continue to worsen. This, says the broker, will limit any share price outperformance until such time as things improve in the group’s core markets.

Also likely to impact on the share price is the move by management to defer any dividends until there is an improvement in its markets. ABN Amro suggests the decision brings future earnings into question, as it is a de facto suggestion that even tougher times remain ahead for the group.

As an example of this, the broker notes the company has reported 1H earnings of around US$76 million, but for the full year, profit is likely to be at the lower end of its guidance range of US$95-$116 million. This highlights how much weaker the second half is likely to be.

The broker was not alone in being surprised by the decision to suspend dividend payments given the strength of the company’s cash flows, taking it to mean the company either expects to incur additional costs with respect to asbestos liabilities or it is building a war chest for potential acquisitions. 

To factor in lower expectations for the US housing market, where the group has a significant portion of its operations, the broker has cut its earnings estimates in FY10 by 36% and in FY11 by almost 42%, while also cautioning there are likely to be similarly large cuts to consensus numbers going forward.

Some changes have already been made, as for example both Citi and UBS have lowered their numbers post the result. However, the changes by UBS have been relatively modest and the stockbroker remains slightly above market consensus in coming years. As a result, UBS retains its Buy rating, one matched by only Credit Suisse according to the FNArena database.

One concern for UBS is the scope for some legacy issues regarding asbestos liabilities. Another is the inherent tax implications from a change in domicile. These concerns are shared by others in the market and are also noted as contributory reasons why, as JP Morgan puts it, there is little reason to rush into the stock.

Others agree, as the database shows five Hold ratings, with Merrill Lynch arguing there is value in the stock at current levels even allowing for poor market conditions, but the value Merrills sees is very long-term, as the stock is unlikely to make any run higher in the short-term.

Deutsche Bank agrees, pointing out while management continues to do a great job they simply cannot offset the fact conditions are getting worse rather than improving. Citi has a similar view, its Hold rating reflects the broker’s view James Hardie is a quality company, but now is simply not the right time to be buying into the stock.

In the view of JP Morgan, this means an Underweight rating is more appropriate, as the lack of any positive catalysts mean there is little reason to be in the stock at present. JP Morgan and Macquarie were the only brokers in the database to rate the stock as Underweight until today when the changes to its forecasts caused ABN Amro to downgrade to Sell from Hold.

Post the quarterly result the average price target on the stock is $5.32, down from $5.58 prior to the result. Today, shares in James Hardie are weaker and as at 12.40pm the stock was down 18c or 4% at $4.22, which compares to a trading range of $3.82 to $7.07 over the past 12 months.

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