While high auction clearance rates show there is certainly demand for housing, it is not flowing through to new housing starts, which continue to languish. Likewise with the mining sector coming off the boil and civil construction activity just plodding along, building materials company Boral (ASX: BLD) been forced to downgrade its profit expectations.
Management highlighted "declining residential construction activity in Victoria, project delays in both Victoria and South Australia and poor weather in south east Queensland" as contributing factors to stresses in the Construction Materials & Cement division. At the same time, Boral's Australian Building Products division is also facing difficulties with lower demand and increased competition at its Western Australian brick and masonry operations and also pricing pressures on its timber products.
At the low end of Boral's updated guidance range for the financial year ending June 2013 of $90 million in underlying net profit after tax, shareholders are looking at a 10% decline on the previous corresponding period. In early trade, Boral's shares were down over 5% after this announcement.
Over the past 12 months the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 18%. A check across the board at some listed peers shows that investors appear to be factoring in a recovery, with Boral, Brickworks (ASX: BKW) and Fletcher Building (ASX: FBU) all outperforming the index.
Source: Google Finance
There are likely some company-specific factors at play here and not the general domestic climate. Boral is also exposed to the USA and Asia markets, where the near-term outlook is more promising. While Brickworks' share price has been buoyed thanks to ongoing attempts by activist investors to see the company divest its holding in Washington H. Soul Pattison & Co. (ASX: SOL). These investors believe there is value to be unlocked by separating the two companies from their current cross-shareholding arrangement. Lastly, Fletcher Building has exposure to the New Zealand economy and the re-build, which is currently underway in the wake of the 2011 Christchurch earthquakes.
Foolish takeaway
There is certainly potential for building material stocks to provide decent returns to investors over the next few years given the current stage of the building cycle and that valuations, in general, appear reasonable.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
