Rising interest rates both in Australia and the US mean consumers have less money to spend on constructing new homes or even renovating existing ones.
It's this logic that's seen the share price for construction materials provider James Hardie Industries plc (ASX: JHX) drop 36% so far this year.
Fairmont Equities managing director Michael Gable agreed in a research note that the market was nervous about the business outlook.
"The weakness in housing has the potential to significantly impact James Hardie's Repair and Remodel (R&R) segment, to the point that earnings weakness from the R&R segment are likely to overshadow the earnings benefit from internal initiatives."
However, he thought this was overemphasised and that the stock actually represented excellent value for buying right now.
Repair and remodel business could be stronger than the market expects
Firstly, Gable pointed out that the R&R business is, by nature, pretty stable through different parts of the economic cycle.
"In the event of a mild recession, the R&R segment should prove resilient, given its growing portfolio of relevant products, a strong channel position and brand and marketing."
Moreover the current rising interest rate environment is significantly different to the typical period when loan repayments are rising.
"Work-from-home trends post-COVID are still driving activity, supported by home equity," said Gable.
"Home equity is at an all-time high buoyed by recent strong price gains and home equity loan balances remain low by historical standards."
Even though James Hardie originated in Australia, these days North America is a dominant revenue drive.
And home owners are simply in a different situation to Australian mortgage holders.
"While there are numerous pressures on disposable incomes, the fact that 90%+ of mortgages in the US are 30-year fixed, the feed-through of higher rates is somewhat less systemic in their impact."
Two potential stock price catalysts
So after the sell-off this year, James Hardie is a bargain buy at the moment, in Gable's opinion.
"With expectations for flat-to-declining EPS growth in FY24, the shares are trading at a significant discount to its recent trading history," he said.
"Having said that, James Hardie's overweight to R&R vs new construction will also help brace earnings, given R&R downturns are shorter and not as severe as new home construction."
The company is due to release its 2023 first quarter results on 16 August and will host an Investor Day next month.
Gable has flagged a couple of potential catalysts that could come out of those days:
- Greenfield expansion in US and Europe
- Update on the search for a new chief executive officer
James Hardie shares closed Friday at $35.98.
