8 building supply stocks to buy

The Investment Reporter regularly monitors 10 top building materials companies. Eight of these manufacturing stocks offer capital gains potential over the next few years.

Manufacturing StocksSince we last reviewed our building supply stocks in July, the 10 stocks are up by an average of 10.6 per cent. This beats the S&P/TSX Composite Index’s corresponding decline of seven per cent.

Key stocks Hardwoods Distribution (TSX─HWD), PFB Corp. (TSX─PFB), Richelieu Hardware (TSX─RCH) and Stella-Jones (TSX─SJ) remain buys. But with high P/E ratios, Richelieu and Stella-Jones expose you to share price risk.

Among non-Key stocks, CanWel Building Materials (TSX─CWX), Goodfellow Inc. (TSX─GDL) and Home Depot (NYSE─HD) remain buys for price gains and dividends. Home Depot’s high P/E ratio increases the riskiness of its share price.

EnerCare Inc. (TSX─ECI) remains an overpriced hold. Norbord Inc. (TSX─NBD) is losing money. Hold—or sell if you can accept little or no risk.

Brick and masonry manufacturing stock is a buy

We’ve upgraded Brampton Brick (TSX─BBL.A) to a buy. Brampton Brick’s shares have moved up by five per cent since our building supply stocks review in July. Given the company’s improving fortunes, we would’ve expected the shares to have risen more. We’ve upgraded Brampton Brick to a buy. But only if you need no dividends and you can accept buying a stock we rate ‘Higher Risk’.

Brampton Brick is Canada’s second-largest manufacturer of clay bricks. It serves customers in Ontario, Quebec, as well as the Northeast and Midwestern U.S. The company operates one brick manufacturing plant in Ontario and one in Indiana.

It writes that “the Company also manufactures a range of concrete masonry products, including concrete brick and block as well as stone veneer products. Concrete interlocking paving stones, retaining walls, garden walls and enviro products are manufactured” at four locations in Ontario and one in Michigan. The products are sold in Ontario, Quebec, Michigan, New York, Pennsylvania, Ohio, Kentucky, Illinois and Indiana. This is a heavily-populated part of the continent.

Sales growth has turned loss to profit

In the nine months to September 30, Brampton Brick earned nearly $5.4 million, or 47 cents a share. This was a turnaround from a loss of over $3.7 million, or 34 cents a share, a year earlier. This was thanks to sales growing much faster than costs.

In the first nine months, Brampton Brick’s sales jumped by 13.9 per cent, to nearly $94.7 million. Revenue from masonry products came to over $66.2 million, or 70 per cent of total revenue. Revenue of landscape products accounted for over $28.5 million, or the other 30 per cent of total revenue.

Building materials manufacturer has several pluses

Brampton Brick has some things going for it. One is a return to profitability. In 2015, we expect the company to earn 60 cents a share or so. This would represent a turnaround from last year’s loss of 37 cents a share.

A second plus is that Brampton Brick trades at an attractive forward price-to-earnings revenue of only12.3 times. This suggests that it’s cheap.

A third plus is that Brampton Brick’s shares trade far below their book value of $13.21 a share. This, too, suggests the shares are cheap.

And so does Brampton Brick’s price-to-cash-flow ratio of 4.5 times. Ratios of five times or less are often considered a buy indicator.

Interest rate hike may damp building supply stocks

Brampton Brick also faces risks. The U.S. central bank is getting close to raising interest rates. Some expect chair Janet Yellen to raise interest rates as soon as December. This could hurt construction markets and building materials companies. Also, impartial foreign observers have said that houses in Canada’s strongest markets are overvalued.

We’ve now upgraded Brampton Brick to a buy. But only if you need no dividends and you can accept buying a stock we rate ‘Higher Risk’.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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