4 stocks in the booming retail construction products industry – October 28, 2021

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The Zacks construction products retail industry has benefited from the continuing trend of consumers towards home improvement and maintenance activities. Rapid urbanization and favorable housing market trends are an added benefit. Industry players are investing in omnichannel capacity building to meet demand. The pursuit of these positive elements is likely to benefit industry participants such as Home Depot, Inc. (HD Free report), Lowe’s Companies Inc. (MEUGLER Free report), Fastenal Company (QUICK Free report) and FirstSource Builders, Inc. (BLDR Free report).

About the industry

The Zacks Construction Products – Retail segment consists primarily of US home improvement retailers, industrial and building material manufacturers, and wall panel and ceiling system distributors. Some industry participants offer products and services for home decorating, repairing and renovating, as well as home delivery and installation services. A few industry players provide construction products, ranging from cement and concrete foundation materials to roofing panels and shingles. The companies also sell lumber, insulation materials, drywall, plumbing fixtures, hard surface flooring, lawn and garden decor products. Some players also sell threaded fasteners and manufactured and natural stone slabs. In addition to general consumers, industry players address professional builders, subcontractors, renovators and retailers.

4 trends shaping the future of the construction products industry

Favorable housing market conditions: The outlook for the retail construction products industry is closely tied to conditions in the US real estate market. Low mortgage rates and strong demand for residential properties have helped the housing market. The continued increase in consumer home buying activity should bode well for players in the retail construction products industry.

Membership in home renovation activities: Consumers have continued to invest in making their homes pleasant and comfortable. In fact, the extended stay indoors amid the pandemic made people realize the importance of homes. Despite the easing of restrictions related to the pandemic and increased travel outdoors, Americans continue to look to home improvement and maintenance projects. Industry experts believe consumer discretionary spending on homes is likely to continue, as the interest in keeping homes well maintained is here to stay. Renovating interiors to facilitate home working and entertainment needs remains a major trend. In addition, DIY (DIY) projects for decorating and maintaining furniture and accessories are widely undertaken. There is a higher demand for gardening tools as well as products related to home activities such as paint and tool kits. Such benefits, along with rapid urbanization, are expected to continue to contribute to the high-level performance of industry participants.

Zoom on digitization: Participants in the retail construction products industry have witnessed an increase in online business transactions, thanks to the growing digital dependence of consumers. Companies have therefore strengthened their digital presence by expanding the availability of online assortments and strengthening omnichannel capabilities. These prudent steps have helped businesses meet accelerated demand. Companies are also stepping up their delivery operations in order to provide safe and timely services, especially to professional (Pro) customers. The boom in digital transactions is expected to continue to fuel the frontline of major industry players.

Rising costs: Some home improvement retailers are incurring additional costs to provide improved payments and other benefits to employees amid the pandemic. In addition, a few players have witnessed inflationary pressures in all product categories as well as higher transportation costs. Such an increase in costs is likely to put pressure on margins. Nevertheless, companies adopt prudent cost-saving measures to cushion the impact of these costs.

Zacks Industry Rankings Shows Strong Outlook

The Construction Products – Retail industry is housed within the larger retail and wholesale business of Zacks. The industry currently holds a rank 12 of the Zacks industry, which places it in the top 5% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates good prospects for the near term. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of industries ranked by Zacks is the result of positive earnings prospects for all of the constituent companies. Looking at revisions to overall earnings estimates, it appears that analysts are gradually gaining confidence in the earnings growth potential of this group. Since the start of April 2021, the industry’s profit estimate for the year has increased by 16%.

Given the encouraging outlook for the industry, we present a few stocks that you might consider purchasing for your portfolio. But before that, it’s worth taking a look at the industry’s stock performance and its current valuation.

Industry vs. Wider market

Zacks Building Products – Retail outperformed the larger Zacks Retail-Wholesale sector, but underperformed the Zacks S&P 500 in the past year.

The industry gained 35% during this period against a drop of 4.1% for the whole sector. Meanwhile, the S&P 500 rose 39.6% during this period.

One-year price performance

Current industry assessment

Based on the 12-month forward price-to-earnings (P / E) ratio, which is the multiple commonly used to value retail and wholesale stocks, the sector is currently trading at 22.11X versus 21. 59X for the S&P 500. Additionally, the industry’s 12-month forward P / E stands at 27.66X.

Over the past five years, the industry has traded up to 23.23X and up to 16.03X with the median standing at 19.23X, as shown in the chart below.

Price / earnings ratio (over the past 5 years)

4 construction product stocks to watch closely

Builders first Source: This Dallas, Texas-based company manufactures and supplies building materials. The company is benefiting from increased demand for its integrated services, supported by an improved housing market and the shift to suburban living. Strong demand for single-family homes and low mortgage rates remain positive winds for the company’s products and services. The company is focused on investing in innovations and improving digital solutions for its customers. This Zacks Rank # 1 (Strong Buy) company has been active on the acquisition front, which supports revenue. It also focuses on cost management practices. The stock jumped 86.9% in one year. Zacks’ consensus estimate for its current year sales and profit shows growth of 116.4% and 108.3%, respectively. The consensus estimate of current year profit has remained stable over the past 30 days.

You can see The full list of today’s Zacks # 1 Rank stocks here.

Price and consensus: BLDR

The welcome deposit: This Atlanta, Georgia-based home improvement retailer has benefited from strong demand for home improvement projects. The company is effectively adapting to the high demand environment, driven by investments in its business, which include increasing assortments and delivery systems. It has enjoyed higher sales to Pro customers. The company is on track with its strategic investments to create a Pro ecosystem that includes professional grade products, exclusive brands, improved delivery, field sales support, HD rental and more. This Zacks Rank # 2 (Purchase) company strives to strengthen omnichannel functions such as curbside pickup and in-store online shopping services with convenient pickup lockers. The stock has gained around 38% in one year. Zacks’ consensus estimate for its current year sales and profit indicates growth of 10.1% and 20.5%, respectively. The consensus estimate for current year earnings has improved 0.3% over the past 30 days.

Price and consensus: HD

Lowe companies: The leading home improvement retailer based in Mooresville, NC benefited from strong growth in its Pro business. Careful partnerships help the company provide professional customers with a wide range of assortments that meet their specific home renovation and maintenance needs. To continue driving sales to professional customers, the company has increased brands focused on professionals. Lowe’s is making good progress with the advancement of the digital channel. The company is investing in improving omnichannel retail capabilities. It has completed the installation of Buy Online Pickup in Store contactless lockers in all stores. Lowe’s is also gaining traction with the Total Home strategy which includes providing complete solutions for various types of home repair and improvement needs. Impressively, shares of this company Zacks Rank # 2 have risen 43.6% in one year. Zacks’ consensus estimate for its current year sales and profit shows growth of 3.9% and 27.9%, respectively. The consensus estimate for current year earnings has improved 0.6% over the past 30 days.

Price and consensus: LOW

Fastenal Company: This Winona, Minnesota-based wholesale distributor of industrial and construction products benefited from an increase in the combination of fastener sales. Industrial sales are one of Fastenal’s main growth engines. Additionally, this Zacks Rank # 2 company is striving to increase its portfolio of onsite locations. The company has also implemented prudent cost control measures to reduce the pressure resulting from rising operating expenses. Fastenal is also working to expand its presence in e-commerce. Notably, the stock rose about 29.4% in one year. Zacks’ consensus estimate for its current year sales and profit indicates growth of 5.2% and 5.4%, respectively. The consensus estimate of current year profit has improved by a dime over the past 30 days.

Price and consensus: FAST


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