On Feb 6, 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, supply chain disruptions and a weak economy, NCI Building returned to profitability in the second half. The company’s fourth-quarter fiscal 2014 adjusted earnings per share increased 90% year over year to 19 cents driven by commercial discipline along with the recent realignment of manufacturing operations. Overall in fiscal 2014, the company reported profit of 16 cents per share compared with breakeven results in the prior fiscal.
With this performance, the company is back on track to deliver revenue growth along with operating margin expansion, and positive earnings in 2015. NCI Building also expects improved margins in fiscal 2015 guided by greater commercial discipline, manufacturing efficiencies and volume-driven operating leverage.
Moreover, NCI Building is optimistic about investment in growth initiatives. The company‘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. Backlog at fourth-quarter end was $334 million, up 4% year over year. Notably, in November, the first month of fiscal year 2015, the company’s backlog increased 11% year over year and bookings showed 27% growth over the same period last year. Moreover, leading indicators for nonresidential construction activity continue to trend positive, which bodes well for NCI Building.
Recently, NCI Building completed the acquisition of Pittsburgh-based CENTRIA. The acquisition will augment its 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 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 2014 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. Historically, the segment has accounted for 5% of the company’s total revenues
NCI Building currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Graña y Montero SAA (GRAM), Armstrong World Industries, Inc. (AWI) and Headwaters Incorporated (HW). While Graña y Montero SAA sports a Zacks Rank #1 (Strong Buy), Armstrong World and Headwaters carry a Zacks Rank #2 (Buy).
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