The Zacks Building Products – Retail industry is likely to benefit from the successful execution of technology initiatives to bolster the e-commerce experience. Companies have been strengthening digital ecosystems, providing the best online assortments and bolstering omni-channel capabilities. Companies are also benefiting from accretive acquisitions, the focus on expanding supply-chain facilities and digital initiatives. However, broad-based pressure across the business, driven by softened consumer demand versus expectations, is likely to impact the performances of the industry participants. Severe constraints related to supply chains and labor availability, a deflation in lumber prices, and product and transportation cost inflation are worrisome.

Continued innovation and e-commerce expansion, and strong demand are likely to benefit industry participants like The Home Depot Inc. HD, Lowe’s Companies Inc. LOW, Fastenal Company FAST and Builders FirstSource, Inc. BLDR.

About the Industry

The Zacks Building Products – Retail industry mainly comprises U.S. home improvement retailers, manufacturers of industrial and construction materials, and distributors of wallboard and ceiling systems. Some industry participants offer products and services for home decoration, repair and remodeling, and in-home delivery and installation services. A few industry players provide construction products, ranging from cement or concrete foundation materials to roofing boards and shingles. The companies also sell lumber, insulation materials, drywall, plumbing fixtures, hard-surface flooring, and lawn and garden decor products. Some players deal in threaded fastener products, and manufactured and natural stone tiles. In addition to general consumers, the industry players cater to professional builders, sub-contractors, remodelers and retailers.

3 Trends Shaping the Future of Building Products – Retail Industry

Demand for Do-it-Yourself (DIY) and Pro Projects: Despite a slowdown in the spending trends, revamping interiors to facilitate work-from-home and entertainment needs continues to be a major trend. DIY projects for decorating and maintaining furniture and fixtures are being widely undertaken. Additionally, consumers are open to hiring professional (“Pros”) help to complete their home renovations, resulting in rising demand for Pro projects. Companies noted that Pro backlogs continue to be healthy and elevated. This is likely to aid companies in the home improvement space, with a focus on building Pro offerings.

Digitization & Acquisitions in Focus: Retail Building Products industry participants have been witnessing a surge in online business transactions, owing to consumers’ growing digital dependency. The focus on virtual platforms to boost customer engagement has been rewarding for top-line growth of many industry players. Companies have, therefore, been strengthening their digital presence by expanding the availability of online assortments and bolstering omni-channel capabilities. Such prudent measures have been aiding the companies to meet the accelerated demand. Companies are also ramping up their delivery operations in order to provide safe and swift services. The digital transaction boom should continue to drive the top lines of the key industry players. Acquisitions have been crucial parts of the growth strategies of companies in the Retail Building Products industry. Some Players continue to focus on exploring acquisition options to expand extensively across vast geographic boundaries and improve organic revenues.

Rising Costs: Inflationary pressures, tight supply chains and labor shortages have been concerning for players in the home improvement industry. Such increased input costs are likely to put pressure on margins. A deflation in lumber prices is also expected to hurt the performance of participating companies. Some companies have provided conservative views for 2023 based on assumptions about lower consumer spending trends, normalized transactions and continued investments to capture market share. Many economists have projected flat real economic growth and consumer spending for 2023. The industry is expected to witness gradual normalization in transactions, as consumer spending has shifted from goods to services. The continued shift is likely to result in a low-single-digit decline in the home improvement market.

Zacks Industry Rank Indicates Solid Prospects

The Building Products – Retail industry is housed within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #63, which places it in the top 25% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential.

Given the industry’s encouraging prospects, we present a few stocks that you may want to consider buying for your portfolio. But before that, it is worth taking a look at the industry’s stock-market performance and current valuation.

Industry Vs. Broader Market

The Zacks Building Products – Retail industry has outperformed the broader Zacks Retail-Wholesale sector and the Zacks S&P 500 over the past year.

The industry has rallied 19.7% in the past year compared with the broader sector’s growth of 9.8%. Meanwhile, the S&P 500 has registered a 15.8% rise in the same period.

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is the commonly used multiple for valuing Retail-Wholesale stocks, the industry is currently trading at 17.73X compared with the S&P 500’s 19.12X. Further, the sector’s forward-12-month P/E stands at 21.44X.

Over the last five years, the industry traded as high as 23.43X and as low as 14.25X, with the median at 18.95X.

4 Building Products Stocks to Watch

Builders FirstSource: The Dallas, TX-based company manufactures and supplies building materials. The company has been benefiting from its focus on cost synergies, strategic acquisition, and robust demand from solid housing and repair and remodeling activities. Robust demand for single-family housing, R&R and other activities have been tailwinds for the company’s products and services. Builders FirstSource continues to focus on investing in innovations and enhancing digital solutions for its customers.

Acquisitions are important for Builders FirstSource’s growth strategy to supplement its organic growth and expand extensively across vast geographic boundaries. The Zacks Rank #1 (Strong Buy) company has been active on the acquisition front, which is supporting its top line. It is also focusing on cost-management practices. The BLDR stock has risen 129.2% in a year. The Zacks Consensus Estimate for the company’s current fiscal-year sales and earnings indicates declines of 23.3% and 29.6%, respectively, from the prior-year period’s reported figures. The consensus estimate for current fiscal-year earnings has been unchanged in the past 30 days.

Home Depot: The Atlanta, GA-based company is the world’s largest home improvement specialty retailer based on net sales. Home Depot has been benefiting from ongoing investments. Continued strength in the Pro and DIY categories, and digital momentum have been the key drivers. Its interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters, aiding digital sales.

Home Depot is witnessing significant benefits from the execution of its One Home Depot plan, which focuses on supply-chain expansion, technology investments and digital enhancements. The company has created the fastest, most efficient delivery network in home improvement through options like buy online pick up in store, buy online deliver from store and curbside pickup. The Zacks Rank #3 (Hold) stock has risen 15.7% in a year. The Zacks Consensus Estimate for HD’s current fiscal-year sales and earnings indicates year-over-year declines of 1.4% and 8.7%, respectively. The consensus estimate for current fiscal-year earnings has moved up 0.3% in the past 30 days.

Lowe’s: The Mooresville, NC-based leading home improvements retailer has been gaining from strong growth in its Pro business. The company has been enhancing the experience of its pro customers by upgrading pro-focused brands and revamping the pro-service business’s website. The company has also been well-positioned to capitalize on the demand for the home improvement market, backed by investments in the technology and merchandise category. Gains from the Total Home strategy and the execution of the Perpetual Productivity Improvement initiative are likely to drive the company’s results in the near and long terms. The Total Home strategy has been resonating well with Pro and DIY customers for a while.

Lowe’s has been progressing well with advancements in the digital channel. The company is investing in enhancing omni-channel retailing capabilities. Management is also committed to enhancing the Pro offerings, expanding the company’s market share and driving the operating margin. Shares of the Zacks Rank #3 company have rallied 14.3% in a year. The Zacks Consensus Estimate for its current fiscal year’s sales and earnings indicates declines of 7.9% and 3.2%, respectively, from the year-ago quarter’s actuals. The consensus estimate for current fiscal-year earnings has moved up 0.6% in the past 30 days.

Fastenal: The Winona, MN-based wholesale distributor of industrial and construction products has been benefiting from strong demand for manufacturing and construction equipment, as well as supplies. The company’s focus on virtual platforms to boost customer engagement is improving sales and driving growth. Cost-control strategies like automating warehouses, increasing delivery efficiency through its trucking network and selling more private-level products with higher margins are aiding FAST to improve efficiency, thereby increasing returns.

Industrial vending is one of the primary growth drivers for Fastenal and has the potential to significantly increase sales and profits. The Zacks Rank #3 company is striving to boost its onsite location portfolio, in which a mini-Fastenal shop is located in a customer’s facility. The FAST stock has risen 14.9% in a year. The Zacks Consensus Estimate for the company’s current fiscal-year sales and earnings indicates year-over-year growth of 5.1% and 4.8%, respectively. The consensus estimate for current fiscal-year earnings has been unchanged in the past 30 days.
The Home Depot, Inc. (HD): Free Stock Analysis Report

Fastenal Company (FAST): Free Stock Analysis Report

Lowe’s Companies, Inc. (LOW): Free Stock Analysis Report

Builders FirstSource, Inc. (BLDR): Free Stock Analysis Report

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