5 Building Products Stocks for Better Returns Despite the Industry Woes

Core Insights - The Zacks Building Products - Miscellaneous industry is experiencing challenges due to a tough real estate market and inflation affecting consumer sentiment, but increased government infrastructure spending is providing support [1] - Companies like Arcosa, Armstrong World Industries, Frontdoor, Construction Partners, and Latham Group are positioned to benefit from operational excellence, diversification strategies, and higher infrastructure investments [1] Industry Overview - The industry consists of manufacturers, designers, and distributors of home improvement and building products, including ceiling systems, doors, windows, and infrastructure rehabilitation solutions [2] - Companies also provide equipment rental services to a diverse customer base, including construction firms, utilities, and government entities [2] Current Trends - Rising costs due to inflation in transportation, materials, and labor are compressing margins and affecting operating performance, with companies attempting to recover costs through price increases [3] - The industry's outlook is closely linked to the U.S. housing and renovation markets, which are currently under pressure from inflation and a challenging real estate environment [4] Government Infrastructure Spending - Strong global trends in infrastructure modernization and U.S. government initiatives to rebuild roads and bridges are expected to benefit industry players [5] - Improving residential construction markets are anticipated to drive growth, with builders cautiously optimistic for 2025 due to shifting demand towards new homes [5] Operational Strategies - Industry participants are implementing cost-saving initiatives, investing in new products, and pursuing strategic acquisitions to enhance profitability and market access [6] - Companies are focusing on operational excellence and digital solutions to boost revenues [6] Industry Performance - The Zacks Building Products - Miscellaneous industry ranks 160 out of over 250 Zacks industries, indicating it is in the bottom 36% with bleak near-term prospects [7] - Aggregate earnings estimates for the industry have been revised downward, reflecting a loss of confidence in earnings growth potential [8] Stock Performance - The industry has outperformed the S&P 500 Composite and the broader Zacks Construction sector over the past year, with a rally of 47.6% compared to the S&P 500's 31.5% increase [10] - The industry is currently trading at a forward P/E of 17.4X, lower than the S&P 500's 21.7X and the sector's 17.8X [11] Notable Companies - Arcosa: Focused on infrastructure-related products, with a strong performance expected in 2024 due to infrastructure spending [13] [14] - Armstrong World Industries: Thriving through innovative products and strategic acquisitions, with a recent acquisition expected to bolster its market position [15] [16] [17] - Construction Partners: Benefiting from solid demand for infrastructure services and recent acquisitions to expand operations [18] [19] - Frontdoor: Focused on boosting demand through brand investment and technology infrastructure [19] [20] - Latham Group: Gaining from improved cost structures and recent acquisitions to enhance margins and sales growth [21] [22]