The recovery in U.S. housing activity continues to support top-line growth, but lower margins leave analysts slightly disappointed by James Hardie’s third-quarter results. Third-quarter sales increased 13% to USD 320.4 million, with revenue for the first nine months up 7% to USD 994.5 million. Having a larger negative impact than expected, were the combination of increased demand for lower-price products and costs associated with increasing capacity. Gross margin fell from 32.8% in the first half to 30% in the third quarter. Underlying earnings before interest and taxes (EBIT) declined 5% to USD 144 million in the first nine months.

Current caution in the housing market makes builders more priceconscious and increases demand from more price-sensitive first-home buyers and the multifamily sector. This means lower average selling prices for James Hardie. Analysts dp not expect the trend to reverse suddenly, but expect prices to increase gradually as confidence and house prices rise and independent home builders re-enter the market. This, combined with increased volumes, should slowly drive group EBIT margins back to 20%.

The lower growth reflects a cyclical recovery in lower-priced housing occurring first and higher fixed costs to capitalise on a recovery in U.S. housing. The firm’s unique technological advantage and sole focus on fibre cement gives it a portfolio of superior products and cost advantages. While strong earnings growth is expected from recovery in U.S. housing and increased share of the total siding market, James Hardie appears overvalued, with inherent volatility in residential construction seemingly being disregarded.

Facility upgrades and expansions increased net capital expenditure by over 60% to USD 41.3 million. Cash of USD 160 million and no debt on the balance sheet are supportive of growth and efficiency initiatives. The improvement in U.S. housing starts continued in the third quarter. According to the U.S. Census Bureau new single-family housing starts increased 29%. U.S. and Europe fibre cement were clear beneficiaries, with sales up 16% and volumes up 17%. Sales and volumes for the first nine months were up 11% and 13% respectively. EBIT was far less impressive for reasons mentioned previously. At 17.5% the EBIT margin is well below the 20% target.

The third-quarter marked a recovery in Asia Pacific Fibre Cement, with sales and volumes increasing 6%. Sales for the first nine months were down 2%. Underlying EBIT was disappointing, down 13% to USD 58.2 million. Weak housing hurt volumes and prices, but EBIT margins are still attractively above 20%.


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