Company Snapshot – James Hardie (JHX)

Building the case to buy in a dip

This month, the stock in focus is James Hardie (JHX). We frequently talk about how often value is created by short-term problems within companies. If a company’s stock is sold down on an issue impacting earnings, and if the issue is short-term in nature, or less material than the market and analysts realise, then this can create a good entry point for buying the stock. Such an opportunity recently presented itself with James Hardie.

James Hardie produces building materials for the residential and commercial construction industries. They have operations in Asia-Pacific and Europe, but their main operations are in North America. Their flagship product is fibre cement, used primarily in external cladding, where James Hardie enjoys a 90% market share in the US. Fibre cement currently represents around 19% of the external cladding market in North America, with alternatives being vinyl (26% market share), wood (21%) and brick (8%).

While their market share and product advantages put them in an excellent position in a growing market, execution of strategy is also vital – and this is where James Hardie performed poorly last year. Poor manufacturing performance led to issues with the supply of product into market. This, in turn, led to lost revenue, cost blow-outs and concerns that relationships with key distributors and customers would be at risk. Concerns about these relationships and the capital expense involved in fixing supply issues (for example, adding production capacity) resulted in the share price falling dramatically.

How to assess the opportunity

As a fund manager, deciding whether this is an opportunity or a situation to avoid, involves doing your homework to determine the efficacy of management’s plans to turn the situation around, and hence the underlying value of the company. In this case, it involved engaging management so they could articulate their outlook directly to us, as well as utilising research, which surveyed key customers to see whether those relationships were permanently impacted. After much in-depth research and discussion, it was determined that the company maintained a very strong advantage in a market with an excellent thematic, and the sell-off was considered an opportunity.

Going forward, it is important to continually assess the execution of management against their own plan and their competitors.

Quick Stats:

  • Total sales reached US$2 billion in 2016
  • James Hardie employs 3,577 people in North America, Asia and Europe
  • They are the largest fibre cement producer in North America.
WARNINGS AND DISCLOSURES: This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.

Contact Us