James Hardie Industries (ASX:JHX) is a leading international building materials group that produces a wide range of fibre cement building materials used in the exterior and interior of residential and commercial buildings.
The company is also the largest seller of home siding (imitation wood) in the US, and produces fibre cement in the US, Australia, New Zealand and the Philippines.
Approximately 80% of JHX’s sales come from the housing industry, and the majority of this exposure is via the US housing market.
Although the US property crash has been a millstone on JHX, recent evidence suggests the market may have turned the corner.
JHX focus on efficiency and market share gains has placed it in an advantageous position to benefit from increased US housing activity.
US housing recovery
Although the US housing sector has been in a well established decline for much of the past five years, recent evidence is pointing to a long-awaited recovery.
Among the relevant housing indicators for James Hardie are housing starts and building permits.
Housing starts measure the number of new monthly building constructions, whilst building permits are more of a leading indicator in that they measure the number of new monthly residential building permits.
Since May 2011, both these indicators have been steadily rising in a sign Americans are beginning to take advantage of the country’s record low interest rates.
Furthermore, we see this momentum continuing due to the slowly strengthening US jobs market and the Federal Reserve’s pledge to maintain low interest rates until the end of 2014.
In late November, JHX reported a 1Q12 net operating profit of US$41.2 million, which was double its result in 1Q11.
Despite reporting low demand, James Hardie was able to achieve its profit on the back of operational improvements such as a reduction in fixed costs, as well as an increased share of the fibre cement market.
This increased market share, positions JHX well in the event of an acceleration of the US housing recovery.
JHX forecast FY12 net operating profit of US$126 – US$140 million. Although management was cautious about the outlook for US housing, recent data points to a noticeable pickup in this industry.
With US employment inching higher, housing affordability high and the Fed committed to a record low interest rate environment, there are enough incentives to drive continued improvement in residential construction activity.
We at the Australian Stock Report believe that a focus on cost control and increasing market share has placed JHX in a strong position to leverage off any US housing recovery.