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US housing recovery a tick up for Boral

This month Boral (ASX: BLD) held an analyst presentation in the US, speaking about the revival of the US housing market, and how its revenues should expand as that country gets past the debacle of the sub-prime lending market.

Using data from the US Census Bureau, analysts were told that US housing starts had bottomed out in 2009-2011, going under the historical trough of 830,000 houses, and hitting a low of around 500,000. Currently, levels are around 896,000 as of July, yet that is still much lower than the market average for underlying demand of 1.5 million homes. That level was last achieved in 2007 just when the GFC was beginning.

In the company’s estimation of the US economy, the housing market was growing at 2% average quarterly growth since late 2009, and even though the economy as a whole is still recovering, consumer confidence is at a six-year high.

Lending conditions have improved, and foreclosures were down 61% from its March 2010 peak. The average US housing analysts are forecasting housing starts to rebound to 1.1 million homes in FY2014.

How does Boral stand to benefit from this recovery and how is it positioning itself for more business? Since 2009, it has made several acquisitions of competitors, establishing itself as number one in providing brick, clay and concrete tile and stone veneer, as well as second largest supplier in fly ash (used for concrete).

The US subsidiary aspires to have turnover of over US$2 billion within the total US$33 billion US housing exterior market. Back in 2005, when housing starts were over 2 million, the company had revenue of US$611 million, with earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 22%. During the GFC in 2009, revenues fell to US$406 million and realised a net loss. In 2013, it saw higher revenue — $569 million — but still was turning a loss.

Currently, 66% of its US revenue is from residential homes, but in the future it wants to change that so that residential homes is 50%, and non-residential and repair/remodel segments are 25% each. This is to diversify exposure to market ups and downs.

It is also consolidating its branding so that company divisions and previously acquired competitor brand names are all changed over to only the Boral name and logo.

Within Boral itself, the US subsidiary only generates 10% of total revenues, with 78% coming from Australia and 11.2% in Asia. The last year it turned a profit was 2007.

Another Australian company that would benefit from an upturn in the US housing market is James Hardie (ASX: JHX), which had 69% of its turnover coming from the US.

Foolish takeaway

Even if the US housing market improves to the level projected by the company, overall it won’t be a complete game changer for Boral’s total profits since the subsidiary’s portion of total earnings is small. Any improvement would be welcome, but the parent company needs the Australian property market to be on the move again, and soon.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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