Shares in building products supplier Fletcher Building Limited (Australia) (ASX: FBU) were down by more than 3% in today's trading. At around $6.15, the shares have dropped to what has proven to be a key level of support over the past few years.
Fletcher Building has endured a tough year as its share price has fallen by nearly 28% over the last 12 months — though it has paid out reasonable dividends through the period.
Why did this happen to Fletcher Building shares?
This morning, Fletcher announced net earnings after tax of $172 million for the six months ending 31 December 2015. That's a nice headline compared to its $114 million profit in the prior comparable period, but a closer view of the result reveals that Fletcher faces headwinds.
Operating earnings excluding significant items, like goodwill impairment and gains on asset sales, were down 4% year on year at $278 million. With underlying earnings going backwards and revenue at a virtual standstill (up 2% at $4.4 billion), investors needed some upbeat outlook commentary to support the stock today.
That's not what the market got from CEO Mark Adamson, who told Fairfax this about Australia's new housing starts:
'The resi boom in Australia is a hell of a boom, I just don't see it continuing. It is more likely to drop from 210,000 [new dwellings a year] to 150,000 in the next few years.'
That downbeat assessment explains why investors have overlooked the fact that several of Fletcher Building's Australian businesses — Laminex, Iplex, Fletcher Insulation, Rocla Pipelines, Stramit and Tasman Sinkware — all grew earnings compared to a year earlier.
Fletcher Building does expect that it will continue to benefit from strong market conditions in the New Zealand construction industry. However, investors have honed their attention today on the mixed outlook for the Aussie residential and commercial construction business.
With the share price of Fletcher Building's listed peer Boral Limited (ASX: BLD) falling in sympathy today, investors in the building products sector seem to be bracing for a rough ride.
What's next for Fletcher Building Limited (Australia)?
In the face of cooling conditions for Australia's construction market, it's pleasing that Fletcher Building is seeking to sell more innovative 'value-added' building products. To the extent that new products can help to boost Fletcher Building's pricing power, this move could drive revenue growth.
The firm is creating a strong competitor in the New Zealand windows and doors market as it forms a joint venture with aluminium manufacturer and supplier Nalco. It is also growing its dividend in NZD terms, which could make Fletcher Building an attractive yield play after 12 months of share price shrinkage.
Foolish takeaway
Companies exposed to the construction industry are a good example of what we call 'cyclical' stocks. Their share prices typically rise and fall rapidly in reaction to expectations of future economic growth or decline.
That means a stock like Fletcher Building is best suited to hands-on investors who can follow its outlook closely and trade when the conditions warrant it.
