The James Hardie Industries plc (ASX: JHX) share price is crushing the S&P/ASX 200 (INDEXASX: XJO) today. With the JHX share price up 14% versus the barely noticeable 0.1% nudge from the ASX 200 after lunch time, Seneca’s Luke Laretive explains what you need to know.
James Hardie share price over time
1Q24 Result and Guidance
James Hardie released its quarterly result for the quarter ending 30 June 2023, after reporting its full-year FY23 result in March earlier this year.
James Hardie reported an adjusted net income of $174.5 million for the quarter, beating guidance of $145 million-$165 million due to market share gains and easing cost pressures such as lower freight costs.
In its North American segment, lower volumes (-9%) were partially offset by higher prices (+3%). James Hardie is the market leader in its flagship fibre cement, commanding ~80% of the US market. Due to its strong market position, adjusted EBITDA margins of 29.2% are above peers.
Because of its US-centric business, the company has fared better in the face of higher interest rates due to the higher proportion of fixed-rate mortgages in the US, relative to Australia, so we expect building and renovation demand to be more resilient.
Sales decline but JHX share price up?
The only sustainable way to make money in the share market is to understand what you know, what everyone else knows and know how to exploit the difference.
Similarly, when assessing company results, you need to compare the reported numbers to the market’s prior expectations.
JHX pointed to an improvement in 2Q, with adjusted net income forecast at $170 million-$190 million, above analyst forecasts. The market is forward-looking, so it looks for guidance to forecast earnings and arrive at valuations. The unexpectedly bullish outlook was not priced into shares, with JHX shares trading at its median 10-year Enterprise Value/EBIT multiple.
We previously discussed in April the reasons why JHX was under-loved and represented good value in this video interview as a top ASX large cap pick.
Improving macro
JHX indicated a more favourable overall economic situation, raising anticipations for a decrease in its target market for 2023 to a range of 5% to 18%, compared to the previously projected decrease of 14% to 19%.
The industry data supports this, with the US home builders index performing well relative to the Australian equivalent.
Additionally, the JHX business has evolved over the last decade to derive ~65% of group revenues from more resilient repair and remodel work, with the remaining ~35% from new housing (which is more sensitive to the business cycle).
JHX: cyclical growth at attractive prices
Amidst rising interest rates, the narrative surrounding the collapse of new building activity and renovations is, in our view, overplayed.
Building materials businesses have been oversold, but green shoots are emerging, with the latest trading update from Reliance Worldwide Corporation Ltd (ASX: RWC) supporting this thesis. CSR Limited (ASX: CSR) is a more Australia-focused building materials business, but looks similarly oversold, as we outlined here.
Bottom-of-the-cycle earnings paired with bottom-of-the-cycle valuations is a recipe for sustainable outperformance.
While these cycles tend to play out over a number of years, and the share prices certainly tend not to appreciate in a straight line, up-and-to-the-right, behavioural biases (recency, risk aversion) often see earnings positively surprising to the upside.
Where is JHX’s dividend?
Due to JHX’s US-based earnings, it does not generate franking credits so prefers to buy back stock instead of paying out dividends to shareholders.
The company announced on 8 November 2022 that a share buyback would replace its ordinary dividends. Given that this coincided with a JHX share price of ~$29, near the 12-month lows, this appears to have been a savvy move by management and accretive to shareholders.
Takeaways for the JHX share price
Today’s share price reaction looks largely based on improving guidance, however, the boat hasn’t sailed, and we think the market is still too bearish.
James Hardie is a max-overweight position in our Australian Shares SMA and we continue to have a positive view on shares as analysts upgrade their forecasts.
