Building the structures in which we work and live is a huge industry. As you watch a building rise from an empty lot, what you see is the construction workers who make that happen. But there's a web of companies that provide these hard-working men and women with the parts and supplies they need to do their jobs. That's the heart of the building-products industry. And three stocks you'll want to watch in the building-products industry are Owens-Corning (NYSE:OC), Builders FirstSource, (NASDAQ:BLDR), and Cemex SAB de CV (ADR) (NYSE:CX).
First things first
One of the first things to know about the building-supply industry is that it's cyclical and highly reliant on the building cycle. That is why Cemex, which makes and sells cement, saw its revenues falter at the tail end of the global 2007 to 2009 housing-led recession. Cement, of course, is used to create the foundations of buildings among other construction purposes.
So, construction activity, including residential, commercial, and industrial construction, will drive Cemex's results. However, the company has a global footprint, with operations in more than 50 countries. Which means you'll need to keep a close tab on global construction activity across a broad range of sectors if you own this cement giant. But Cemex's market diversification can provide a balance when just one or two regions are struggling.
Northern Europe, the United States, and Mexico are the primary markets to watch here, however, since combined they account for about 70% of revenues. Another factor to keep in mind with Cemex is that cement is the main product, but it also makes aggregates (crushed rocks) and produces such things as roof tiles, pipes, and concrete blocks. In other words, it's involved in more than just the foundation of a building.
Raising the walls
With the foundation laid in a new construction, the next thing to look at is the structure. And there you'll want to watch Builders FirstSource. This company is much smaller than Cemex, operating in just nine southern and eastern states in the U.S. It has roughly 55 manufacturing and 55 distribution facilities, many of which share locations. The health of the U.S. housing market is the most important thing to watch here.
Builders FirstSource's products include roof and floor trusses, wall panels, stairs, aluminum and vinyl windows, custom millwork, and prehung doors. It also distributes dimensional lumber and lumber sheet goods, as well as millwork, among other building products. Essentially, all the things you need to put up a building. With a list like that, you might have already guessed that the housing-led recession was tough on the company.
Unlike a Home Depot store, Builders FirstSource sells directly and primarily to professional builders. This is a highly competitive market and one that is tied directly to new-home construction. That said, it also happens to be a fragmented market, with only a small number of large players. That allows Builders FirstSource the opportunity to grow via bolt-on acquisitions, which is an interesting angle to watch here.
Insulating the structure
With the foundation laid and the walls up, it's time for some finishing touches. That's where Owens-Corning comes in. This building-products manufacturer creates roofing, insulation, and composites. The company's primary market for roofing and insulation is North America (the United States and Canada). However, within composites, foreign sales account for about 60% of the business.
You've likely seen Owens-Corning's asphalt shingles and pink foam sheets or rolls of insulation at local construction sites and may even have them in your own home. Clearly, these two segments are highly tied to the home construction market, which makes North American construction a key performance driver. And, yes, the 2007 to 2009 recession hit Owens hard.
The composites operation, however, is a little different. Essentially, this segment sells fiberglass to customers as varied as the construction, transportation, industrial, and consumer markets. That provides a little bit of a ballast against home building volatility, with demand for fiberglass recovering more quickly from the recession than Owens' construction-related roofing and insulation. Still, the driving force at this company, like the other two above, is construction. But you'll want to watch fiberglass for growth.
From foundation to roof
If you are watching the building products industry, you'll want to keep an eye on Cemex, Builders FirstSource, and Owens-Corning. That said, there are a lot more companies to consider in the space if you decide that these three, which touch different and important aspects of the complicated construction process, aren't for you. But this trio of key industry players will provide a broad overview of what's going on in building products and give you a taste for which area or areas you'll want to highlight in your portfolio.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.