Boral, Brickworks, CSR, James Hardie: Is the building sector about to boom?

Tomorrow, July 17, the latest Australian Bureau of Statistics (ABS) Building Activity report will be released. This update, while a lagging indicator, is important as it provides an accurate assessment of the past rather than forecasts based on expectations garnered through insights such as building permits, land sales, new house orders and new home housing finance. Importantly the update will show how many housing starts occurred during the March quarter.

As reported by the Housing Industry Association, 2013 building activity is coming off a low base. In 2012, housing starts fell in Victoria, SA, Tasmania and the ACT with housing starts near decade lows across the country.

Here are four companies that offer exposure to the building and construction sectors that investors may wish to investigate further should they see evidence that the industry is picking up.

Boral (ASX: BLD) and James Hardie (ASX: JHX) not only have domestic businesses but they also have overseas operations too. James Hardie in particular provides investors with substantial exposure to US dollar earnings and exposure to a recovering US housing market. Given the high fixed costs associated with their assets, Boral is currently seeing a loss in its US division, which provides significant leverage to an increase in US volumes.

Brickworks (ASX: BKW) is the largest producer of bricks and pavers in Australia. It has top notch management that runs extremely efficient kilns and factories. Brickworks’ cross shareholding with Washington H Soul Pattison (ASX: SOL) can in some ways be viewed as a benefit for shareholders, however it does also act as a drag on its leverage to the housing cycle.

CSR’s (ASX: CSR) share price has shot up over the past year, providing shareholders with an 89% return. Before dismissing the stock thinking that a recovery is priced in, investors should be aware that CSR’s impressive return over the past 12 months comes after a number of years of underperformance. Over the past few years CSR has sold off its sugar division, cut costs and recently written down its disastrous acquisition of glass manufacturer Veridian. Current management at CSR has hopefully now dealt with all the legacy issues and set the company up to prosper when the housing cycle turns.

Foolish takeaway

Signs of life in the residential construction industry, if they continue, will more than likely lead to vastly improved earnings for building materials companies. Of course once investors have decided that it’s the right point in the cycle to invest, they then have to determine if the upturn is already priced into the stock.

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Motley Fool contributor Tim McArthur owns shares in CSR.

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