Skip to Content

US Videos

A Watchlist of Building Suppliers

In an industry with mixed business quality, a handful of names stand out.

A Watchlist of Building Suppliers

James Krapfel, CFA

Oct 10, 2014

James Krapfel: Business quality is mixed across our building-supplier coverage universe. Right now, we give narrow moats to Fortune Brands (FBHS), Masco (MAS), USG (USG), and Lennox (LII), while Mohawk (MHK) and Owens-Corning (OC) do not possess moats, in our opinion. In this somewhat to very commoditized industry, we believe moat sources are most easily attained through intangible assets from brand building as well as cost advantages from company-owned distribution.

We scored Fortune Brands and Lennox the best across our proprietary fundamental framework, which looks at the extent of cyclical catchup opportunities, secular growth prospects, operational execution, and capital allocation.

As far as end-market exposure, big end markets for these building suppliers are residential new construction and nonresidential construction. And we see 10% average annual growth rate to get to the mid-cycle conditions. Another big end market for these players is residential repair/remodel, which is about 40% of these companies' revenues. And we see about 4% to 6% growth rate in this over the next five years.

Regarding valuations, we think Mohawk and Masco are overvalued, but Owens-Corning just [became 4-star rated] as of this taping, at a 17% discount to our fair value estimate. We also see Fortune Brands, Lennox, and USG as slightly undervalued but still at 3 stars.

Transparency is our policy. Learn how it impacts everything we do

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

How we make money

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your personal data

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

Verify your identity, personalize the content you receive, or create and administer your account.
Provide specific products and services to you, such as portfolio management or data aggregation.
Develop and improve features of our offerings.
Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

How we approach editorial content

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.