Recent housing trends have sent building materials companies share prices up as home prices rise in the capital cities. More buyers will be considering new houses or units, or building new houses as prices for existing homes grow out of reach. This increase is getting investors focused on building materials.
Building approvals data from the Australian Bureau of Statistics (ABS) showed that January was the thirteenth month of trend estimate increases, and for that month alone approvals were up 1.3%. The seasonally adjusted estimate for total dwellings climbed even higher by 6.8%. Houses rose stronger than units.
Approvals are a leading indicator, showing what will be constructed over the next 12-18 months. As construction proceeds, more building materials will be used and sales will rise.
James Hardie Industries plc (ASX: JHX) just released third quarter results for FY2014, they showed that for the nine months ending December 2013, it had a 12% sales rise on the pcp. Net operating profit for the nine months increased 39% to US$152 million. Investors bought up the shares to a new all-time high of $15.06.
The recovery of the US housing market is boosting earnings, where about 70% of its 2013 revenue came from. Australian housing construction growth should benefit the fibre cement maker, whose products such as HardiePlank and HardiePanel are used for siding, walls and paneling.
Boral Limited (ASX: BLD), maker of cement, drywall, and other building materials, also set a new 52-week high of $5.66 last week. At the end of February, it reported that its creation of a new joint venture (JV) with USG Corporation, the largest drywall producer in the US, was finalised.
The JV agreement entailed the sharing of assets in Australia, Asia and the Middle East, and as a consideration for USG's 50% ownership, it paid Boral US$500 million. In 2013, revenue from Asia and the US was about 11% for each. Joining up with a major US producer will help expand its international footprint.
Foolish takeaway
The housing market started taking off in 2012, so we are a little more than a year into the current trend. As long as interest rates stay relatively low and housing demand is rising, we may see several more years of housing growth.
I believe these two stocks can go further, with leading indicators like building approvals pointing the way to more construction and future earnings growth.
