Morningstar Investor users sign in here.

Video

Doubts over James Hardie's bullish outlook

The building materials supplier's long-term North American market share forecast is too ambitious, says Grant Slade 

Mentioned: James Hardie Industries PLC (JHX)


Glenn Freeman: In this edition of "Ask the Expert" I'm discussing the recent result of James Hardie which delivered its third quarter results. So, why is James Hardie screening as so expensive at the moment at a premium of around 40 per cent to your fair value estimate?

Grant Slade: Sure. Look, James Hardie screens extensively in spite of our continued optimism for their North American fiber cement business, really on the basis that the recent performance from the business in the last 12 months after their new CEO Jack Truong took the top job has been outstanding. While we remain incredibly optimistic about those growth prospects for their fiber cement franchise in North America, the markets' expectations now eclipse ours. The stock is now as a result priced to perfection.

Freeman: So, fibre cement is the one game, the big game for these guys and particularly within North America. Why are investors so bullish about this and overly so, in your view?

Slade: Fiber cement is an exterior wall cladding product that continues to chip away at the share of vinyl cladding in the U.S. and as it does so, is providing earnings growth for James Hardie that is outpacing the market generally. That story had been called into question at the start of last year as the transition to a new CEO took place. However, Truong has come into the job with a new sales strategy and has reinvigorated that above-market index growth that had been lacking for the 18 months to two years prior to his appointment in the role. That's reignited the markets expectations for just how big the fiber cement category and Hardie's terminal market share within that category can be.

Freeman: So, the new CEO is really having a positive impact. And that's part of this this investor reaction you believe?

Slade: That's right. So, that's the major reaction. So, to perhaps provide some context, the siding market was flat in the first half of James Hardie's fiscal 2020 year. Nonetheless, Hardie was able to grow its volumes by growing effectively above the market. By growing above the market, it is grabbing market share from vinyl and other cladding substrates. Q3 was even better. So, while the market itself returned to growth of about 2.5 per cent, Hardie's volumes up a very strong 11 per cent. So, it's growing a full 8.5 per cent approximately above the market. And with the December quarter housing figures having come out, Hardie's fourth quarter looks as though it will be just as strong if not stronger.

Freeman: And if we cast our mind back, in January, it was a best ideas stock on Morningstar's list. What would it take for it to become a 5-Star stock once again?

Slade: It would just be a reversion simply of investors' expectations around the ability of Hardie to continue to garner market share.

So, we remain incredibly optimistic about those long-term prospects for this business. It's a narrow moat business on the basis of its substantial brand equity that provides pricing power for the business.

And we think that that brand equity will allow Hardie to continue to grow its market share from a current 17 per cent all the way up to 25 per cent. So, that's another sort of 8 per cent of market share over the coming decade.

However, the way the stock currently trades, there's the implied market share gains that are that are effectively discounted into that price are north of 30 per cent. Now, Hardie's own long held target for market share in the North American market is around 32 per cent.

The current share price implies that they will not only get there, but go even a little bit further, perhaps towards the 35 per cent market share kind of level.

Freeman: Which you don't really necessarily think is going to happen?

Slade: So, what we're talking about is, investors have now baked in expectations that Hardie will execute perfectly on their plans and some more. And on that basis, it's a sell when we rate it as a 1-Star stock.



© 2023 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

More from Morningstar

Bank results: the winners and losers
Video

Bank results: the winners and losers

Morningstar analyst Nathan Zaia explains how the banks did and what the future holds.
How to deal with financial stress
Video

How to deal with financial stress

More high-income earners are now also experiencing financial stress. We go through practical ways to reduce it
UniSuper CIO John Pearce on why the 60/40 portfolio is far from dead
Video

UniSuper CIO John Pearce on why the 60/40 portfolio is far from dead

The $130 Billion SuperFund Manager also talks about how he sees risk, his recent investments, and why history isn’t a good guide to the future.
Incitec Pivot: explosive upside ahead?
Video

Incitec Pivot: explosive upside ahead?

Morningstar analyst Mark Taylor believes imminent growth in explosives earnings could lift sentiment.
Why Morningstar see opportunities in coal stocks
Video

Why Morningstar see opportunities in coal stocks

Analyst Jon Mills explains why he’s recently increased fair value estimates for Australian coal companies.
Is the sharp fall in ResMed's share price justified?
Video

Is the sharp fall in ResMed's share price justified?

The potential for weight loss drugs to impact the sleep apnea giant has weighed on the share price, though Morningstar analyst Shane Ponraj thinks...