The FOMC is on track to cut rates later this year, and that is good news for the housing market and construction stocks. The only question is the timing, which may be later than expected, but the timing isn’t what matters. What matters for home builders and construction materials makers like Acuity Brands (NYSE: AYI), JELD-WEN (NYSE: JELD) and Masonite International (NYSE: DOOR) is that the housing market is normalizing, a trough is in place, and growth is expected to return this year.
The FOMC cutting rates will be a tailwind for the housing market, and there is no doubt about that. Cutting rates will fuel demand for home-improvement HELOCs and refi’s to upgrade old homes and unleash the new home market. As it is, the market is pricing in a cut for late spring, possibly in May or June, but the first may not come until late summer or fall.
In this scenario, construction materials stocks may remain range-bound until later in the year, but that is also good news. Investors will have time to build positions while these companies generate cash flow, repurchase shares, make strategic acquisitions, and position themselves for accelerating growth in 2025.
Acuity Brands widens margins in 2023
Acuity Brands struggled in 2023 with mixed market conditions, leading revenue to decline YOY. However, the critical information is margin and earnings, which widened and grew. Earnings grew 20% in FQ1/CQ4 due to improving costs and efficiency, with margin strength expected to persist.
The outlook for F2024, ending August 2024, is solid. Analysts expect revenue to decline by a low single-digit with sequential and YOY growth returning by year-end. Margin will be the highlight of the year, improving sequentially to drive a nearly 40% increase in earnings. Top- and bottom-line growth is forecasted to continue in F2025 with revenue of $4 billion, up about 125 bps on a 1 and 120 on a 2-year basis.
Acuity Brands pays a dividend, which is a token amount; the company chooses to return value via repurchases. The payout is worth about 0.25%, with shares trading near 15X earnings, and is in place primarily to keep dividend-focused funds and investors in the mix. Regarding repurchases, Acuity Brands' cash flow was ample and allowed for aggressive repurchasing. Share repurchases topped 4% for the year and should continue at a similar pace through the end of F2025.
JELD-WEN divests, builds cash, widens margin
JELD-WEN Holdings manufactures various home components, including doors, windows, showers, staircases and more. The company is in contraction now, along with many in the business, but growth is expected to return in C2024, compounded by wider margins. Highlights from Q3 2023 include the completed divestiture of its Australia-based business, a narrower-than-expected top-line contraction and significantly wider margins.
Again, margins are widening on efforts to improve efficiency and repositioning, including an inventory reset. Inventory, i.e., working capital, plays a role in bottom-line performance and balance sheet strength. The takeaway is that earnings, cash flow and FCF are all up on a continuing operations basis, and the margin is expected to widen again in F2024. Balance sheet highlights include a 30% reduction in long-term debt, a 46% increase in cash and a 15% rise in shareholder equity.
Masonite International Corporation delivers record cash flow
Masonite International’s door business suffered in F2023 along with the rest of the industry, but like the rest, margins remained solid, and the company delivered ample cash flow. A record, to be precise, driven by cost efficiency, working capital management and mix.
Among the highlights of the FQ32023 report was the acquisition of Fleetwood, a manufacturer of premium doors, extending the company’s reach into the higher end of the product spectrum. The forecast for Q4 is tepid; revenue and earnings will contract again, but Q4 2023 results are offset by the estimates for 2024. Analysts expect to see a low-single-digit improvement in revenue with a wider margin.
The company’s cash flow improved nearly 4X on a YOY basis, aiding repurchases and the balance sheet. The company's stock count fell 0.7% in the quarter, while cash, assets, and equity were up. Leverage remains low at 1.1X, leaving sufficient wiggle room for the company to make strategic acquisitions while maintaining its capital returns.
