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Deutsche Bank analyst Joe Ahlersmayer initiated coverage on 22 building supplies and materials stocks Thursday, with Buy ratings on 12 of them. He issued one Sell rating, with the rest getting Hold recommendations.
His largely bullish view on the homebuilding sector relies on the argument that while home sales and starts have declined recently, there's still much more demand for housing than there is supply.
"Setting aside near-term starts volatility, the size of the long-term supply/demand gap is what is important for construction volumes and building product demand," Ahlersmayer wrote in a note to clients. Since the 2008 financial crisis, "levels of new construction have lagged actual demand and have severely lagged pent-up demand now materializing, particularly among younger cohorts starting families."
The shortfall, running in the millions of units, "should fuel continued growth in new residential construction activity and a more sustained peak, even once reached," he said. In addition, he's bullish on the repair and renovation market due to the aging U.S. housing stock, higher mortgage rates locking in existing homeowners, and record rises in home equity from home price appreciation.
His top picks are: Armstrong World Industries (NYSE:AWI), +0.8%; Core & Main (NYSE:CNM), +1.9%; Fortune Brands Home & Security (NYSE:FBHS),+0.3%; and Trex (NYSE:TREX) +0.4%.
Other Buy-rated stocks are: AZEK Company (NYSE:AZEK), -0.8%; Beacon Roofing Supply (NASDAQ:BECN), +3.0%; Builders FirstSource (NYSE:BLDR), +2.5%; Masonite (NYSE:DOOR), +0.9%; PGT Innovations (NYSE:PGTI), +3.8%; SiteOne Landscape Supply (NYSE:SITE), +3.0%; Advanced Drainage Systems (NYSE:WMS) +2.6%; and Watts Water Technologies (NYSE:WTS) +0.6%.
Ahlersmayer's sole Sell-rated stock is American Woodmark (NASDAQ:AMWD), -3.8%, where he says cost headwinds have hurt EBITDA margins. In addition, the cabinetmaker is 90% exposed to in-stock home center and builder direct sales together — "both difficult channels to capture price and where pull-through demand could soften to a greater extent," Ahlersmayer said.
In the Hold-rated bucket: TopBuild (NYSE:BLD), Installed Building Products (NYSE:IBP), Jeld-Wen (NYSE:JELD), Masco (NYSE:MAS), Mohawk (NYSE:MHK), Mueller Water Products (NYSE:MWA), Owens Corning (NYSE:OC), Pool Corp. (NASDAQ:POOL), and Watsco (NYSE:WSO).
The SA stock screener picks BuildersFirstSource (BLD) as the top stock in building products.
SA contributor Stephen Simpson likes Armstrong World Industries (AWI) as it's leveraged to non-residential recovery and pricing