We have added narrow-moat-rated James Hardie Industries to our Best Ideas list.
Shares in the industrial building materials company look compelling, currently trading at sizable margin of safety versus our fair value estimate of $21.20.

At 11am Wednesday, James Hardie (ASX: JHX) was trading at $15.68 in depressed trading.

Tepid market share gains and softer-than-anticipated US housing starts in the first half of fiscal 2019 have led to share price weakness with Hardie's share price down 30 per cent since early August. While US housing starts stalled in October, we believe the recovery still has a significant runway.

housing building property James Hardie

The recovery in US housing has a 'significant runway', according to Morningstar analysts

We forecast US single-family housing starts to peak in 2022 at 1.61 million starts, some 26 per cent above the market's expectations for construction activity in 2018.

More importantly, we expect residential construction activity to continue to normalise following a lost decade. As such, we see midcycle housing starts of 1.46 million in fiscal 2028, in line with long-term historical averages and 15 per cent higher-than-expected 2018 activity levels.

The cyclical upswing in US housing and a further 3 per cent of market share gains will likely drive an acceleration in sales growth in the coming five years, with a sales CAGR of 11.9 per cent compared with the 9.2 per cent sales CAGR achieved over the preceding five years.

With operating margins to remain robust and average 19.2 per cent over the coming five years, we see returns on invested capital averaging a healthy 21 per cent over the same period.

Morningstar's monthly Best Stock Ideas highlights high-quality Australian and New Zealand companies, which are currently trading at discounts to our assessed fair values.

The ideas, chosen from our coverage universe of more than 200 companies, are intended to have broad application in a variety of equity strategies, but individuals should consider their personal investment goals and positioning before investing.

AT A GLANCE: JAMES HARDIE INDUSTRIES

  • Morningstar analyst rating: Four stars
  • Fair value estimate: $21.20
  • Discount/(Premium) to FV: 25%
  • Economic moat: Narrow
  • Uncertainty rating: Medium