On Nov 19, we issued an updated research report on NCI Building Systems Inc. (NCS), one of the major integrated manufacturers of metal products for the North American non-residential construction industry.
After incurring losses in the first half of 2014 due to the impact of inclement weather, NCI Building reported a fivefold increase in earnings to 10 cents per share in the third quarter of fiscal 2014 (ended Aug 3, 2014) aided by improved pricing.
With this performance, the company is back on track to deliver revenue growth along with operating margin expansion, and positive earnings in the balance of 2014. The company also expects improved margins in fiscal 2014 guided by greater commercial discipline, manufacturing efficiencies and volume-driven operating leverage.
Moreover, NCI Building is optimistic about investment in growth initiatives. NCI Building‘s growth strategy comprises driving profitability through operating leverage, increase of distribution channels and market penetration through new products. Further, the company will continue to focus on boosting manufacturing efficiencies through its integrated business model.
Recent booking trends are expected to support revenues going forward. Bookings in the third quarter were up 14.3% year over year. 5.6% growth in backlog to $337 million positions the company well for the last quarter. NCI Building expects quarterly improvement in bookings and backlog to continue through the rest of 2014.
Recently, NCI Building announced that it has agreed to acquire Pittsburgh-based CENTRIA. The acquisition will augment NCI Building’s leadership position while expanding the range of its cutting edge proprietary product offerings in the architectural metal panel market. Moreover, leading indicators for nonresidential construction activity continue to trend positive, which bodes well for NCI Building.
However, NCI Building plans to pay the acquisition proceeds of CENTRIA in cash, which will be raised by issuing $250 million of new senior unsecured notes. This will further raise its debt position. The company’s debt-to-capitalization ratio as of the quarter-end was 50%. After the issuance, it will go up to 67.5%.
One of the important raw materials for NCI Buildings is steel. The steel industry is cyclical in nature and steel prices have been highly volatile in the recent years. For the first three quarters of fiscal 2014, steel represented approximately 69% of the company’s cost of goods sold. The prices may remain volatile in the future, thereby posing as a headwind for margin.
NCI Building currently carries a Zacks Rank #3 (Hold). Some better performing stocks in the sector include CaesarStone Sdot-Yam Ltd. (CSTE), Blount International Inc. (BLT) and Trex Co. Inc. (TREX). While CaesarStone Sdot-Yam and Blount International sport a Zacks Rank #1 (Strong Buy), Trex holds a Zacks Rank #2 (Buy).
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