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Boral Limited builds on its returns

The Boral Limited (ASX: BLD) share price continues to outperform the broader market in the wake of Tuesday night’s Federal Budget, as investors remain optimistic on the prospects of Australia’s leading building materials company amidst an infrastructure boom.

Shares in Boral have risen over 37% in the last six months following the announcement of its Headwaters Incorporated acquisition in late November. Alongside peers CIMIC Group Ltd (ASX: CIM) and Downer EDI Limited’s (ASX: DOW) 28% and 35% rallies (respectively), Boral’s share price resurgence is impressive when placed in context of the broader S&P/ASX 200 Index’s (less impressive) 11% rise over the same period.

Whilst a large part of the construction/materials sector gains have been driven by stimulatory Government policies in the United States and Australia, I believe the sector looks fully-valued at current time. In fact, in my opinion, some stocks are beginning to look overbought – none more so than Boral.

Six months ago….

As I wrote here last November, Boral’s acquisition of United States based Headwaters made strategic sense, given it increased Boral’s exposure to the recovering United States housing market.

At the time of writing that article, Boral’s stock traded at $5.07, after the market punished management’s decision to make pay US$2.6 billion for Headwaters. The stock had fallen over 19% in one day, as investors’ feared Boral’s management team had bitten off more than it could chew with the mammoth acquisition. At the time, I rated Boral a buy.

Six months on and Boral has successfully completed the acquisition. Its management team (and those who followed my recommendation) are having the last laugh, with Boral’s share price rallying over 35% since writing that post.

Where to next?

Based on Wednesday’s closing price of $6.77, Boral’s shares are no longer cheap in my opinion. The company trades on a trailing price-earnings of 19.3x, before accounting for any contribution from Headwaters.

Although the company remains in a ‘sweet-spot’ by being a direct beneficiary from a rising housing market and increased fiscal spend on infrastructure, Boral’s outlook may not be as rosy. As listed-peer CSR Limited (ASX: CSR) revealed on Wednesday, Australia’s building products market may be set for decline as signs of a housing construction peak around Australia’s East coast emerge.

This could be especially troublesome for Boral, which generated a whopping 76% of revenues from its Boral Australia division in its first-half of 2017.

Foolish takeaway

Whilst Boral’s diverse operations should insulate its earnings in the event of an Australian housing market slowdown somewhat, I believe the current price offered for Boral’s shares represents full-value for the company’s near term prospects.

Accordingly, I’d recommend those investors who bought the stock last November should look to take some profits off the table by reducing their holdings in Boral.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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