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Why Cornerstone Building Brands Stock Rocketed 28% at the Open on Aug. 12

By Reuben Gregg Brewer – Aug 12, 2020 at 10:57AM

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The construction products company blew the doors off Wall Street's expectations. Investors rewarded that success.

What happened

Shares of construction products company Cornerstone Building Brands (CNR) opened sharply higher on Aug. 12, gaining as much as 28% in the first half hour of trading. By 10:30 a.m. EDT the stock had pulled back from the highs, but was still up around 22%. The big news here came out after the close on Aug. 11, when second-quarter earnings were released.  

So what

The headline number was definitely impressive, with earnings of $0.21 per share up 50% from the same period of the previous year. That said, revenue, adjusted for acquisitions, was down by nearly 8%, thanks largely to the impact of the COVID-19 pandemic. Cost-cutting allowed the company to improve its adjusted EBITDA margins in all three of its main divisions. But the fly in the ointment is that much of the improvement in earnings was related to a tax gain, so the picture is more complicated than it looks. Net income before the tax item was actually down by nearly 60% year over year. The $0.21 earnings figure appears to be a case of Cornerstone putting its best foot forward.  

Two people looking at blueprints at a construction site

Image source: Getty Images.

But that really wasn't the only good news. Notably, Cornerstone Building Brands has a record backlog for residential exterior products. That suggests the company's business has a fairly bright near-term future. Meanwhile, Wall Street had been expecting a loss of $0.08 per share, so Cornerstone's headline earnings figure was truly eye-catching in relation to what was expected. And the second-quarter profit comes on the heels of a huge first-quarter loss. All in, it makes sense that investors were upbeat about the stock in early trading.  

Now what

With a market cap of around $1.1 billion, Cornerstone Building Brands is not a particularly large company. That, coupled with the volatility in its business over the last two quarters, suggests that conservative investors would probably be better off on the sidelines for now. A lot of good news appears to have been priced into the stock today. When the impact of COVID-19 has passed, it might be worth a closer look. But until then, volatility could remain high.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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