James Hardie Industries is under Algo Engine buy conditions and is a current holding in our ASX 100 model portfolio.
JHX will report FY20 earnings tomorrow and previous guidance of $350m to $355m was provided on the 5th May.
The weak demand environment ahead for new residential construction will likely weigh on earnings. The fall in the share price from $33 to $21 allows for these headwinds and a discounted valuation argument builds for both JHX and BLD.
Note: James Hardie has suspended the payment of dividends.
Boral, James Hardie Industries and CSR have rallied from oversold levels, as buyers have been attracted to the reduced PE multiples. The question is whether non-residential and engineering construction will offset the fall in residential construction volumes.
Australian housing approvals have been trending down for the past 6 months with Jan approvals of 172k, down 30% on the same time last year.
BLD, JHX and CSR are now under Algo Engine sell conditions and we remain cautious given the broader market index back drop.
We consider Boral as the best recovery opportunity, but expect short-term sell pressure to persist.
Shares of James Hardie have dropped over 17% in the last three trading sessions and posted a 2.5-year low of $16.60 in early trade today.
The catalyst for the sell off was that JHX’s 2Q EBIT and NPAT fell short of consensus forecasts and management downgraded full year NPAT by 5%.
In the bigger picture, the softening of Q2 margins due to input cost inflation looks to be transitory and the group is still expected to generate net profits of between US313 and US 335 million for FY 2019.
As such, we consider the recent drop in the share price as an opportunity to invest in a high quality business at a time when external factors are increasing input costs.
JHX is part of our ASX Top 50 portfolio and we see scope for a $20.00 initial price target over the medium-term.
During last week’s earnings update, James Hardie provided an FY19 EBIT outlook in the range of US$300-340m. This was slightly below market consensus, suggesting 20% growth will not be achieved and it could be more in the range of flat to 10%.
With the stock trading on a high PE and an FY18 yield of only 2%, there’s not much room for disappointment.
JHX is a current holding within our ASX50 & 100 model portfolios, we’ll watch for the next Algo Engine buy signal and revisit the “buy side” case and update our readers.
Our Algo Engine generated a buy signal for JHX recently at $21.50.
With the US housing cycle remaining strong, (although weak numbers in June are the reason for some caution), and James Hardie having a dominant market position in fiber cement, we think the long term trajectory for earnings & margins are strong.
FY19 revenues should increase 20% and underlying EBIT will jump from $380m to $480m.
With the stock trading on a low 2.2% forward yield, we recommend adding a covered call option to enhance the income.
Selling the $23.50 October strike adds $0.50 per share of additional cash flow.