James Hardie Industries plc (NYSE: JHX) the share price has been under pressure all year after starting to rebound in April 2020 from the hit it took from the pandemic.
From a low of around $9.00 per share on March 16, 2020, it climbed to around $41.50 on Nov 15, 2021, and has since returned to just over $19.00 as of this writing.
Economic headwinds are beginning to have a significant impact on the housing industry, and this has been visible for some time based on the Federal Reserve’s decision to tackle rising inflation by raising rates. interest rates, which led to higher mortgage rates for home purchases. , and higher repair costs with repair and refurbishment (R&R), putting downward pressure on all aspects of the industry.
In this article, we will take a look at JHX’s recent earnings report, and primarily the headwinds it is facing that are unlikely to ease in the near future.
Fiscal second-quarter net sales were $997.6 million, up 10% year-over-year. FX had a negative impact of $30.9 million on net sales during the reporting period and a negative impact of $3.2 million on adjusted EBIT.
Adjusted EBIT for the quarter was $218.5 million, up 6% from the same period in Fiscal 2022.
Adjusted net income for the quarter was $175.8 million, up 13% year-over-year. This figure went from 22% of adjusted gross income in the second quarter of 2020 to an adjusted gross income of 29% in the second quarter of 2021. This is likely to continue to decline in the coming quarters.
Cash flow from operations in the first half of Fiscal 2023 was $246.6 million, down from the first half of the prior year.
As for the outlook, at the time of the earnings report, management said that over the past 45 days they have seen a significant change in sentiment in the housing market. While we knew the housing market would eventually be impacted by rising inflation, interest rates, and mortgage rates, it seems, at least in the markets JHX competes in, that the practical outcome of the increase in negative sentiment is beginning to have an impact on construction and repair and renovation).
As for new builds, JHX predicts that they will fall by more than 30% in the second half of fiscal 2023. For R&R, they should remain stable. With interest rates and mortgage rates rising, that won’t change for the next two or three quarters at a minimum.
According to census data, major builders reported significantly higher cancellation rates.
Break down regions
Net sales in North America for the quarter were $750.6 million, up 18% from a year ago in the same quarter. EBIT was $212.8 million, up 17% year-on-year. EBIT margin was 28.4%, down 0.3 bps from Q2 2022, while EBITDA margin was 32.6%, down 0.6 bps from Q2 2022.
Management pointed out that in the last earnings report it expected mid-single-digit volume growth in the North American market and has now revised it down to minus 5% to minus 8% volume growth. compared to the 2022 financial year.
During the period from September 20, 2022 to October 19, 2022, based on census data, single-family housing starts in North America decreased by 17% compared to the same period of 2021. And for the first time in 2022, completions are now growing faster. than housing starts. During that period, the company said completions were up 11% over housing starts.
In the R&R segment, demand is slowing due to lower consumer sentiment, lower house prices and material inflation which has increased the cost of projects. Combined with the higher cost of capital, even a level prospect seems to be too ambitious.
During the reporting period, net sales were €102 million, down 2% year-on-year, attributed to a 14% decline in volume due to the slowdown in the property market of the region.
EBIT plunged to €4.4 million, down 69%, with an EBIT margin of 4.3%. The reasons cited were increased commodity and material costs, particularly for “natural gas, freight, gypsum and paper.”
At the same time, SG&A investments in Europe increased by 10% thanks to marketing and employee training. Things will get worse before they get better in Europe, and it continues to weigh on the company’s performance in the coming quarters. The company expects net sales in Europe to decline in the second half of its fiscal year.
Net sales in its Asia-Pacific segment were A$211.1 million, up 7% year-on-year in the same period, although volumes were down 4% in due to a tight labor and housing market in Australia, as well as economic difficulties. The company’s customers in the region also worked to adjust their inventory levels downward. EBIT for the quarter fell 7% to A$56.1 million, with a margin of 26.6%. Higher freight and pulp costs and lower volumes are the reasons cited for the lower EBIT.
The company began raising prices in September and October in response to freight and materials inflation and expects margins to rise in the second half of the year.
Even though JHX had a decent quarter, it will probably be the last for the next three quarters, and maybe more. It all depends on central banks, consumer sentiment, freight and materials inflation, and how interest rates and mortgage rates climb before reversing direction.
No doubt construction is going to be hit hard by new housing starts, but I think management may be overly optimistic with R&R also due to material inflation and higher interest rates when consumers are considering taking out loans for the improvement and repair of their homes.
I don’t see any near-term catalyst that will change my thesis that the industry will likely continue to be under pressure for the next three quarters, and possibly much longer.
JHX is subject to a number of market and political forces beyond its control. Until these forces cancel out, I don’t see much positive in the housing market in the near term, or for JHX.
At best, investors should watch and see how far the company’s stock price drops before thinking in terms of a good entry point. I think it’s likely to take big hits whenever the Fed and other central banks raise interest rates, even if there are modest improvements in inflation.