It's been a rather disappointing year for investors in James Hardie Industries plc (ASX: JHX), with shares in the building products maker making gains of just 2% since the turn of the year. Although this is below the ASX's gains of 5%, it is ahead of the performance of sector peer, Brickworks Limited (ASX: BKW) over the same time period, with its shares being down 1%. However, James Hardie could still have a bright future and might present as a better investment opportunity than Brickworks. Here's why.
Growth potential
An initial glance at the two companies' valuations would be likely to leave most investors concluding that Brickworks is the more attractive option. That's because it trades on a P/E of 20.5, while James Hardie's P/E is much higher at 37.3. Both, of course, are above and beyond the ASX's P/E of 16.4.
However, where James Hardie seems to offer more potential than Brickworks is in terms of its growth prospects. Indeed, profit forecasts for Brickworks are by no means poor. The company is expected to increase its bottom line by 11.1% per annum over the next two years. However, the rate of growth on offer is far below that available at James Hardie, since it is all set to see profit rise by a whopping 68.7% per year over the same time period.
Growth at a reasonable price
The effect of this superb growth potential (when combined with the P/E ratios) is to highlight that, although it has a high P/E, James Hardie seems to offer growth at a reasonable price. That's because its price to earnings growth (PEG) ratio is a very attractive 0.5, while Brickworks has a much higher PEG of 1.9.
Income potential and risk
In terms of income prospects, it's pretty much even between the two companies. While James Hardie's yield is an unfranked 3.3%, Brickworks has a fully franked dividend yield of 2.9%. Furthermore, there is little to choose between the two stocks in terms of their relative risk, with their betas both being 0.9.
Looking ahead
Despite both companies having experienced a disappointing 2014 thus far, they both seem to have bright futures as a result of their strong growth forecasts. Certainly, Brickworks looks set to post some impressive earnings numbers, but even though it has a far higher P/E ratio, James Hardie seems to offer more growth at an attractive price. For this reason it could prove to be the better performer moving forward.
