The recent December ADP private payroll and Federal report suggests that there is a revival in construction jobs. While the data showed that the increase could be attributed to the rebuilding after the typhoon Sandy, this is the seventh month in a row for additions to constructions. Since February 2006, the sector has added 39,000 jobs.
This means that there are many good prospects going on this sector. A consecutive job increase in seven months means that majority of the construction companies are expecting strong profits going forward. There are many subsectors in the construction including manufactured housing and recreational vehicles, paint and housing supplies related products and building products.
The thing with housing suppliers is that when the economy picks up, consumers are expected to ramp up their spending on their houses. Our strong pick in the sector is Patrick Industries (NASDAQ: PATK). The company has a $178.17 million market cap and a leading supplier of building products and materials. Aside from that, it also supplies to other industrial markets like kitchen cabinet, household furniture, retail fixtures and commercial furnishings.
Its 9-month financial results confirm our theories that the industry is on its way to making full market recovery. Net sales for the period amounted to $331.2 million, or an increase of 44.3%. The robust growth is attributed to the company’s recreational and manufactured segment, as well as the acquisitions completed in 2011 and 2012. The notable acquisitions during the year include Decor Manufacturing, Elkhart, certain assets of Creative Wood Designs and Middlebury Hardwood Products. This translates to net income of $24.9 million, or diluted per share of $2.32. This already surpasses the full year earnings per share consensus forecasts of $2.30.
The last 5 years have not been stellar for the company. Sales have grown slightly by 0.32% for the period. It incurred a loss in 2009 amid tough operating environment in the housing market. However, it reported better than expected financial results in the succeeding year and reversed the prior year’s loss. For the next 5 years, analysts expect the company to double its profitability from the current levels due to the expected recovery in the housing market.
At present, valuations appear undemanding. In fact, the market is not optimistic over the company’s prospects. With a forward price earnings ratio of 8 times, it means investors do not see any profit growth for the coming years. If you compare its valuation to its historical price earnings ratio band, the current valuation is at the low end range of the band.
The main catalyst for the stock price to move is that the acquisitions it made during the past years will bear fruit. Given its strong balance sheet and access to capital markets, the company remains well positioned to find companies that will expand its product portfolio. This will eventually translate to better valuations in the future.