We have issued an updated research report on NCI Building Systems Inc. NCS on Apr 9, 2015. The company stands to benefit from its efforts to simplify its organizational structure, the CENTRIA acquisition, strong margins, robust backlog growth and commercial discipline. However, increased debt to fund the CENTRIA acquisition, fall in oil prices and restructuring costs will affect NCI Building’s results in the near term.
In the first quarter of fiscal 2015, NCI Building posted adjusted earnings of 3 cents per share, reversing the loss of 5 cents per share incurred in the year-ago quarter. Its streamlined manufacturing organization, commercial discipline and supply chain management continue to drive improved financial results. The Coatings segment has been persistently pursuing product and end- market diversification as well as operational efficiencies to drive profitable growth, while the Components group will benefit from the CENTRIA acquisition. Further, strong margins, backlog growth, commercial discipline and manufacturing efficiencies will benefit the Buildings group.
Leading indicators for nonresidential construction activity continue to trend positive, which bodes well for NCI Building. The CBRE Econometric Advisors data reflects persistently increasing demand in the industrial property sector. Declining vacancy rates will sustain new construction starts especially in the higher volume sectors of warehousing through 2015. The U.S. Architecture Billings Index (ABI), an economic indicator that provides an approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, remained over 50 for most part of 2014. The Jan 2015 Federal Reserve's Senior Loan Officer Survey indicated modest easing of lending standards for commercial and industrial loans. Moreover, Banks have experienced slightly increased demand for nonresidential investment loans for commercial and industrial projects over the last three months.
NCI Building’s acquisition of Pittsburgh-based CENTRIA will augment its leadership position while expanding the range of its cutting edge proprietary product offerings in the architectural metal panel market. NCI will capitalize on the immense growth opportunity offered by architectural insulated panels given their unique appeal in architectural applications that call for attractive aesthetics, high performance, environmental sustainability and economic value. The acquisition is a strategic fit as CENTRIA, like NCI Building, operates an integrated coil coating business that offers a selection of high quality coatings that meet similar aesthetic and performance criteria.
However, NCI Building funded the CENTRIA acquisition by issuing $250 million of new senior unsecured notes with an interest rate of 8.25% that will mature in 2023. This will further raise its debt position. The debt to capitalization ratio as of fiscal end was 49%. After the issuance, it will go up to 66%. Moreover, the increase in interest will weigh on its margins.
The recent slump in oil prices may create a slight headwind for the company’s brands that operate in the oil and gas segment. During the first quarter of fiscal 2015, NCI Building approved the plan to consolidate its three engineered buildings systems manufacturing facilities in Tennessee, closing the Caryville facility. In the first quarter, the company incurred costs of $1.48 million and $0.4 million still remains to be recognized. This will affect margins in the next quarter.
The Zacks Consensus Estimate for NCI Building moved south by 15% to 39 cents for fiscal 2015 and by 22% to 62 cents for fiscal 2016.
Other Stocks to Consider
At present, NCI Building carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Advanced Drainage Systems, Inc. WMS, Quanex Building Products Corporation NX and Trex Co. Inc. TREX. All these stocks carry a Zacks Rank #1 (Strong Buy).
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