James Hardie stock plunges as US housing market deteriorates
The building products giant’s shares have been hit after warning of grim construction conditions in the US and Australia, but not all shareholders were shocked after its deeply unpopular $14bn acquisition gamble.
Building products giant James Hardie suffered its biggest share price crash in five years after conceding the American construction outlook was deteriorating, undermining its wildly unpopular $14bn US acquisition and the souce of a governance firestorm.
Investors were dealt a profit shock as James Hardie’s adjusted net income sunk 29 per cent to $US127m ($197m) for the June quarter, around 20 per cent lower than what the market had expected.
Chief executive Aaron Erter claimed the company had softened expectations when it flagged market uncertainty and sales volatility at its last result, three months ago. The market reaction on Wednesday indicated otherwise: Its shares closed down 27.8 per cent to $32.
“We talked about inventory being relatively normalised, but we said we did see blips on the radar out there. We talked about uncertainty as a growing theme in the first quarter. And we talked about challenges in single-family new construction,” Mr Erter told analysts.
But investors baulked at the miss and the near-term profit picture as it tries to integrate $14bn US rival Azek.
“The question needs to be asked: At what point through the voting process were they aware of this quarter? Were they aware that they were deliberately filling supply chains?” asked David Pace from Greencape Capital, which sold down its entire stake in James Hardie after the deal with Azek was announced, citing “discussions with management and the chair, which were both unsatisfactory and, for us, made it uninvestable”.
“Their premium’s gone now, and what is clear is that they’ve stuffed the supply chains. They’ve sold as much product as they can into the supply chains, and now demand is curbing. And all their product is full in the channel,” Mr Pace said.
North American fibre cement sales dropped 12 per cent in the first quarter to $US641m from a year earlier, driven by soft market demand and inventory management by its customers.
The outlook for the rest of this financial year also caught shareholders by surprise with annual group earnings of $US1.05bn-$US1.15bn, which includes the controversial Azek deal, compared with a consensus forecast of $US1.34bn.
The earnings outlook “is essentially flat from the prior guide, despite the addition of Azek’s contribution of $US250-$US265m, coming in well below expectations”, Jefferies analyst Philip Ng said.
James Hardie was geographically over-indexed to the southern states at 60 per cent, which has been the weakest region, the broker noted.
“With the choppy demand backdrop, channel partners have taken a defensive inventory position, exacerbating volume headwinds for James Hardie,” Mr Ng said.
James Hardie faced criticism earlier this year over “value destructive” dilution, given James Hardie had to issue 35 per cent more shares in itself to Azek investors to fund the deal. It did not have to put that proposal to a shareholder vote, exploiting a loophole in the ASX listing rules.
Chicago-based Azek manufactures home building materials under the TimberTech and Azek Exteriors brands, with a focus on decking, siding and trim products.
The Greencape fund manager said given the company’s gearing going into the transaction, being forced into raising equity was now a real risk.
At the time of the deal, Mr Pace said he’d never seen “such disdain” for shareholders.
The poor outlook and sentiment in the US housing construction business also appeared to have shocked believers in the deal, with signs the worst may be yet to come through the balance of this financial year.
“Uncertainty is a common thread throughout conversations with customer and contractor partners,” Mr Erter said.
“Affordability remains the key impediment to improvement in single-family new construction where, more recently, home builders are moderating their demand expectations, and slowing starts to align their home inventory with a decelerating pace of traffic and sales.”
The building products operator said volatility built throughout April and early May in the US, with single-family new construction activity weaker than expected over the course of the American summer.
“We believe it is prudent to plan for more cautious order patterns and defensive inventory positioning at our channel partners, exacerbated by the slower seasonality of new construction into the back half of the calendar year,” Mr Erter said.
Broker RBC pointed to the single-family building outlook softening since May.
“Today, its expectations have softened by almost 10 points on a national level, and its expectations for the US South seem softer still,” RBC said.
James Hardie also issued a downbeat assessment of the Australian market, tipping it will be “flat to down” in the 2026 financial year.
“While market demand remains challenged, the [Australia New Zealand] team is focused on finding further manufacturing efficiencies and driving … savings to underpin the segments consistent profitability.”
Mr Erter in March brushed off concerns about the timing of the company’s huge acquisition saying the two companies have a history of performing “no matter what’s going on’’.
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