The building materials industry is well positioned for solid growth thanks to huge planned investments in infrastructure and the rising demand for newly constructed homes. However, amid the macroeconomic uncertainties, will it be wise to buy building material stocks Griffon (GFF), United States Lime & Minerals (USLM), and Quanex Building Products (NX)? Read on to learn my view...

Despite macroeconomic challenges, the demand for building materials remains strong thanks to significant investments by the government to revamp and develop infrastructure and the rise in home construction. The focus on building and improving infrastructure and the increase in home construction and improvement activities will likely keep the demand for building materials robust.

Amid this backdrop, it could be wise to buy fundamentally strong building material stocks Griffon Corporation (GFF), United States Lime & Minerals, Inc. (USLM), and Quanex Building Products Corporation (NX).

Before diving deeper into the fundamentals of these stocks, let’s discuss why the building material industry is likely to grow.

Investments in infrastructure are essential for economic growth. The Infrastructure Investment and Jobs Act (IIJA) provides $550 billion over fiscal years 2022 through 2026 to improve roads, bridges, water infrastructure, etc. This is the most significant long-term investment in infrastructure and economy in U.S. history.

Significant investments in infrastructure directly benefit the building material industry. Furthermore, U.S. homebuilding jumped in May as it surged at the fastest pace in more than a year, rising 21.7% sequentially. Low inventory in the existing home market is driving buyers’ interest in new homes.

NAHB’s chief economist Robert Dietz said, “A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year.” The global construction materials market is expected to grow at a CAGR of 11% to reach $3.52 trillion by 2032.

Let's take a closer look at the fundamentals of the featured stocks.

Griffon Corporation (GFF)

GFF, through its subsidiaries, provides consumer and professional, home and building products in the United States, Europe, Canada, Australia, and internationally. It operates under the Consumer and Professional Products and Home & Building Products segments.

In terms of the trailing-12-month EBITDA margin, GFF’s 16.71% is 24.7% higher than the 13.40% industry average. Likewise, its 19.94% trailing-12-month levered FCF margin is 280.2% higher than the 5.24% industry average. Furthermore, the stock’s 35.99% trailing-12-month gross profit margin is 20.9%% higher than the 29.76% industry average.

GFF’s total revenue for the second quarter ended March 31, 2023, came in at $710.98 million. The company’s adjusted gross profit increased 1.3% year-over-year to $269.14 million. Its adjusted EBITDA came in at $136.88 million.

For six months ended March 31, 2023, its net cash provided by operating activities – continuing operations came in at $161.64 million, compared to net cash used in operating activities – continuing operations of $173.37 million in the year-ago period.

For the quarter ending December 31, 2023, GFF’s revenue is expected to increase 0.4% year-over-year to $651.73 million. Over the past year, the stock has gained 62.7% to close the last trading session at $40.74.

GFF’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Momentum and a B for Growth, Value, and Sentiment. Within the A-rated Industrial - Building Materials industry, it is ranked #11 out of 47 stocks. To see GFF’s rating for Stability and Quality, click here.

United States Lime & Minerals, Inc. (USLM)

USLM manufactures and supplies lime and limestone products in the United States. It extracts limestone from open-pit quarries and an underground mine and processes it as pulverized limestone, quicklime, hydrated lime, and lime slurry.

In terms of the trailing-12-month EBITDA margin, USLM’s 34.35% is 99% higher than the 17.26% industry average. Likewise, its 21.37% trailing-12-month net income margin is 200.2% higher than the 7.12% industry average. Furthermore, the stock’s 40.62% trailing-12-month gross profit margin is 43.1% higher than the 28.39% industry average.

For the fiscal first quarter ended March 31, 2023, USLM’s total revenues rose 31.2% year-over-year to $66.78 million. Its gross profit rose 65.8% year-over-year to $23.99 million. Its net income and EPS increased 97.3% and 96.1% year-over-year to $17.10 million and $3, respectively.

Over the past nine months, the stock has gained 95.1% to close the last trading session at $206.98.

USLM’s POWR Ratings are consistent with this positive outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

It has an A grade for Growth, Momentum, and Quality and a B for Stability. It is ranked #9 in the same industry. Click here to see USLM’s ratings for Value and Sentiment.

Quanex Building Products Corporation (NX)

NX, together with its subsidiaries, provides components for the fenestration industry. The company operates through three segments: North American Fenestration, European Fenestration, and North American Cabinet Components.

In terms of the trailing-12-month levered FCF margin, NX’s 7.01% is 33.6% higher than the 5.24% industry average. Likewise, its 9.82% trailing-12-month Return on Total Capital is 39.9% higher than the 7.02% industry average. Furthermore, the stock’s 1.49x trailing-12-month asset turnover ratio is 87.1% higher than the 0.80x industry average.

NX’s net sales for the second quarter ended April 30, 2023, came in at $273.54 million. Its free cash flow increased 108.4% year-over-year to $27.83 million. The company’s adjusted net income came in at $21.71 million. In addition, the adjusted EPS and EBITDA came in at $0.66 and $39.90 million, respectively.

Street expects NX’s EPS and revenues for the quarter ending January 31, 2024, to increase 91.7% and 5.7% year-over-year to $0.35 and $276.90 million, respectively. It surpassed the consensus estimates in three of the four trailing quarters. Over the past nine months, the stock has gained 37.7% to close the last trading session at $26.89.

NX’s promising outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

It has an A grade for Momentum and a B for Value. It is ranked #10 in the Industrial - Building Materials industry. To see NX’s ratings for Growth, Stability, Sentiment, and Quality, click here.

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GFF shares were trading at $40.14 per share on Wednesday morning, down $0.60 (-1.47%). Year-to-date, GFF has gained 20.39%, versus a 16.72% rise in the benchmark S&P 500 index during the same period.

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About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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