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11 January 2019
U.S. Building ProductsBuilding Blocks of 2019
We Forecast Average EPS Growth of 10% for 2019
: Despite an expected deceleration
in the rate of growth, the macro environment should remain positive for building products.
Home equity values are at record highs and an aging housing stock and existing
homeowner base locked into legacy low rate mortgages should allow for expenditures in
2019. We expect repair and remodel activity to grow 4-6% this year, outpacing single
family starts up 3%. In addition to fundamentals, the Fed's potential pause and its
associated impact to rates will be primary factors for the stocks as they look to find a
bottom. Given this, we focus on those with: 1) more defensive end market exposure, 2)
greater margin expansion even with slower revenue gains, and 3) attractive relative
valuation and highlight Outperform rated Stanley Black & Decker and Fortune Brands.
Adjusting Target Prices—It Could be Worth Waiting For:
Historical analysis suggests
the stocks are poised to rally this year. To frame this, we examined periods in which
EBITDA multiples contracted in similar magnitudes and time periods to the move in 2018.
Our analysis found that in the twelve months following these corrections the group traded
an average of 17% off their lows. Questions around the macro environment remain
pertinent but, we believe stronger than expected demand would be the greatest surprise
and could support a significant re-rating. To better capture the potential move, we have
adjusted target prices across our coverage with average upside of 16% for our top picks
2018's Efforts will be 2019's Gains:
Although company pricing power diminished in the
second half of 2018 on lower volumes, we don't believe all will be lost. Cost cutting
initiatives taken over the last 12-18 months along with productivity and new product
introductions will help offset mix shift away from the higher end (and higher margin)
products. This includes Fortune Brand's rationalization and refocus within its cabinets
segment and Stanley's $125mn 4Q restructuring. These moves are likely to come with
moderating commodities and other costs, such as transportation. We believe these factors
will be reflected in results as we move past 1Q. Across our building products coverage, we
have reduced our 2019 EPS estimates by 2%, though this is led by Mohawk and Leggett
Tariffs Could Add to Volatility, Keep a Careful Eye to Demand:
At the current 10%, the
impact from tariffs has been minimal though the potential to rise to 25% has been an
overhang. Should geopolitical tensions with China ease, we believe this could provide a
meaningful lift to valuations, especially for those with greater exposure including Masco,
Fortune, and Stanley. We will keep a careful eye to inventory levels, macro trends, and
shifts in domestic capacity from US and international manufacturers.
Single Family Starts Forecast to Rise 3% in 2019 with Home Prices Up 3%:
Credit
Suisse's economics team notes household financial conditions are strong with
accelerating income growth and stable balance sheets. In turn, the ratio of job vacancies
to unemployed workers has risen to multi-decade highs, indicating the tightness of the
labor market versus historical levels. With this backdrop, we forecast single family starts
up 3% in 2019, slightly below 4-6% gains in R&R, with home prices rising 3%.
Top picks for 2019 and Valuation:
We expect those stocks with greater new home
exposure to be most under pressure while repair and remodel names better withstand the
gradual shift as investors digest greater consistency in results. Our top picks remain
Stanley and Fortune Brands given their exposure and segment-specific initiatives that
should allow for relative outperformance. The group trades at 7.8x our 2019 EBITDA
estimates, vs the 9.9x historical average. Our target prices are based on an average of
8.2x our forward EBITDA forecasts, representing average potential upside of 3%.
We note changes to our estimates and target prices across our coverage universe, as
summarized in the tables that follow.
11 January 2019
U.S. Building ProductsFigure 1: CS Building Products Ratings and Target Prices
P/EEV/EBITDA
TickerName Rating
Current
Target Price
Previous Target
Price
Upside/
DownsideCurrentPreviousCurrentPrevious
SWKStanley Black & DeckerOP
$155$13517%18.4x16.0x10.7x9.5x
FBHSFortune Brands Home & SecurityOP
$49$5315%12.9x13.7x9.4x10.0x
MASMascoN
$34$324%12.9x12.1x8.4x8.0x
OCOwens CorningN
$47$471%9.0x9.0x6.3x6.3x
WHRWhirlpoolN
$125$1252%8.2x8.2x7.2x7.2x
LEGLeggett & PlattN
$40$404%15.9x15.2x11.6x11.2x
IBPInstalled Building ProductsN
$38$38-4%13.4x13.4x8.0x8.0x
MHKMohawkN
$125$125-1%11.2x10.5x6.6x6.5x
JELDJeld-WenN
$17$184%9.3x9.7x6.5x6.7x
USGUSGN
$44$442%23.0x21.8x10.5x10.2x
CSTECaesarstoneUP
$12$13-14%14.3x15.5x4.5x5.0x
Note: Multiples based on NTM estimates; OP= Outperform, N=Neutral, UP= Underperform Source: Company data, Credit Suisse estimates
Figure 2: CS Building Products Estimates
4Q18E2018E2019E
TickerNameCurrentPreviousConsensusCurrentPreviousConsensusCurrentPreviousConsensus
FBHSFortune Brands Home & Security
$0.96$0.96$0.94$3.45$3.45$3.43$3.90$4.00$3.83
SWKStanley Black & Decker
$2.12$2.12$2.10$8.15$8.15$8.14$8.90$8.90$8.78
MASMasco
$0.55$0.55$0.56$2.40$2.40$2.41$2.70$2.70$2.72
LEGLeggett & Platt
$0.54$0.56$0.54$2.41$2.43$2.41$2.55$2.75$2.66
WHRWhirlpool
$4.20$4.20$4.25$14.75$14.75$14.65$15.65$15.65$15.88
IBPInstalled Building Products
$0.60$0.60$0.64$2.55$2.55$2.58$3.00$3.00$2.91
OCOwens Corning
$1.21$1.21$1.23$4.72$4.72$4.75$5.55$5.55$5.47
MHKMohawk
$2.50$2.50$2.50$12.30$12.30$12.30$11.50$12.50$11.76
JELDJeld-Wen
$0.35$0.35$0.35$1.50$1.50$1.51$1.90$1.95$1.85
USGUSG
$0.46$0.50$0.50$1.73$1.77$1.80$2.00$2.10$2.19
CSTECaesarstone
$0.16$0.16$0.19$1.00$1.00$1.06$0.95$0.95$0.95
Source: Company data, Factset, Credit Suisse estimates
11 January 2019
U.S. Building ProductsValuation
Figure 3: Building Products Historic Fwd. EV/EBITDA
4x
6x
8x
10x
12x
14x
16x
201020112012201320142015201620172018
Group95th Percentile5th PercentileMedian
Source: Company data, Factset, Credit Suisse estimates
Note: Data includes: CSTE, FBHS, IBP, JELD, LEG, MHK, MAS, OC, USG, WHR, & SWK
Figure 4: Building Products Historic Fwd. P/E
4x
8x
12x
16x
20x
24x
201020112012201320142015201620172018
Group Avg95th Percentile5th PercentileMedian
Source: Company data, Factset, Credit Suisse estimates Note: Data includes: CSTE, FBHS, IBP, JELD, LEG, MHK, MAS, OC, USG, WHR, & SWK
Figure 5: Framing Peak to Trough Moves
Peak - Trough
Building
Products
IndexPFRI
Building
Permits
Home
Prices
30 yr Mrtg
Rates (bps)
Fed Funds
Rate (bps)
Unemployment
Rate (bps)
June 1983 - July 1984-11%23%-9%5%182 bps175 bps-270 bps
April 1987 - Feb 1989-22%4%-14%14%157 bps300 bps-110 bps
July 1998 - Feb 2000-20%13%5%12%129 bps0 bps-50 bps
Aug 2005 - March 2009-67%-54%-77%-15%-70 bps-300 bps330 bps
Average-30%-3%-24%4%
100 bps44 bps-25 bps
Average ex. housing crisis-18%14%-6%11%
156 bps158 bps-143 bps
Jan - Dec 2018-36%3%-3%5%61 bps100 bps-30 bps
Source: Company data, Credit Suisse estimatesNote: Certain data items unavailable for Nov and Dec 2018。