According to the National Association of Home Builders (NAHB), sales of newly built, single-family homes increased by 15.6% in January 2013.
Rick Judson, Chairman of NAHB, commented: “The surge in demand for new homes this January is an excellent sign that the housing recovery is gaining steam and helping put more people back to work.”The year 2012 has witnessed a recovery in the US housing market, and there is an indication that the environment will get better going ahead. The cement industry is one of the industries that will benefit from this positive move in the US housing market. One of the attractive players in this segment is James Hardie Industries plc (ADR) (NYSE:JHX). James Hardie Industries plc (ADR) (NYSE:JHX) is one of the largest manufacturers of fibre cement products for interior and exterior building construction applications primarily in the United States, Australia, New Zealand, the Philippines and Europe.
“Our sales volume increased 17% in the USA and Europe Fibre Cement segment during the quarter, providing further evidence that the housing recovery in the US is gaining momentum. However, EBIT growth continued to be constrained by a lower average net sales price and elevated costs due to ongoing investment in organizational capabilities ahead of a more active market environment,” said James Hardie CEO- Louis Gries.
“Over the next twelve months, sales growth is anticipated to exceed operating cost increases. EBIT to revenue margins are therefore expected to improve,” said Mr. Gries.
Let us also review quarterly results of other two players in the cement industry.
Eagle Materials, Inc. (NYSE:EXP) declared its Q3 FY 2013 results in early February. Revenues increased by 33% to $164.7 million as compared to the same period last year. Operating earnings from cement for Q3 increased by 7% to $16.6 million as compared to same period last year. The company completed its acquisition of Lafarge North America’s cement plants in November 2012.
Texas Industries, Inc. (NYSE:TXI) had reported its Q2 ended Nov. 30, 2012 results at the start of the year. They reported a net loss of $11.1 million for the quarter. According to CEO Mel Brekhus, “Net sales for cement were up 20% compared to the same quarter a year ago and marks the sixth consecutive quarter that net cement sales exceeded the prior year.”
James Hardie Industries plc (ADR) (NYSE:JHX) is gearing up for long term growth, in expectation of a continued recovery in the US housing market. We have analyzed some key parameters that indicate that company has started taking steps to
increase its organizational potential. These steps are backed by their belief of sustained market recovery, which will positively impact their business segment. This can also be affirmed by the company’s increased expenses in the following heads – Research and Development, Sales and Marketing and additional human resources in various departments.
Increased R&D Expenses, What Does it Mean?
Research and development costs were 43% higher for Q3 FY 2013 at $6.3 million, compared to $4.4 million in the same period last year and 30% higher for the nine month period at $17.6 million compared to $13.5 million in the same period last year. The increase in this cost was due to:
(1) Investment in R&D projects within the USA and Europe and Asia Pacific Fibre Cement segments.
(2) New set-up of R&D facility in Chicago during Q3 FY 2013. The company is also focusing on the non-fibre cement segment.
There was an increase in sales and marketing expenses for three main purposes: promotions, tradeshows and advertising.
As compared to March 2012, there has been an increase in headcount in the Manufacturing dept. by 7%, Marketing, Sales and General and Administrative by 9%, Supply Chain by 29% and R&D by 13%. The company had reduced resources during the slump period, and there is an increase in the same as they foresee further market recovery.
The company is also going to incur capital expenditures in order to increase production capacity. The Board has approved $34 million to increase production capacity at the Fontana, California plant. Fontana was the company’s first plant in the US, which was closed in Dec. 2008. It is a reengineered plant and os expected to re-open in early 2014.
The company may also incur capital expenditure in Australia as they are assessing its existing production capacity to address production capacity needs in the medium term. Other than the US, New Zealand market continues to improve. The Philippines business continues to perform well and is expected to contribute steady earnings in the future.
We feel increased expenses in R&D and Marketing & Sales, addition of human resources, and allocation of capital expenditure to increase production capacity are four main indicators of the company’s aggressive stance. So, if one wants to place his bet on the cement industry, James Hardie Industries plc (ADR) (NYSE:JHX) is definitely worth a look. The company is moving swiftly in order to benefit from favorable market conditions.
The article The Housing Market Recovery, a Boon to Cement Industry originally appeared on Fool.com and is written by Sujata Dutta.
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