The Motley Fool

Should you buy these 2 hot housing construction stocks?

The hot housing market in NSW is filtering into Queensland now with expectations that house prices in the Brisbane market will rise by about 6% in the next 12 months, according to the quarterly residential property survey of National Australia Bank Ltd. (ASX: NAB).

In particular, unit growth is strong, assisted by an increasing number of overseas buyers either immigrating or purchasing investment properties. In 2013 there was a record number of units sold in the inner Brisbane region. Rental vacancies are dropping, which will put added stress on housing demand.

Construction company reports and government figures from the Australian Bureau of Statistics are showing a general rise in housing construction. For investors, the potential for building materials companies to see increased sales is also expanding.

CSR Limited (ASX: CSR), well known for its plasterboard and brick products, produces a variety of building materials. During the GFC when the housing market was subdued, revenue from 2010 to 2013 trailed down, as did earnings per share also.

A strong change was seen in its half year report ending 30 September, with its interim underlying net profit up about 92% to $36.2 million. The interim dividend was raised from 3 cents per share to 5 cps.

In the last 12 months, the share price is up almost 86% to $3.70. Dividend yield is 2.0% and the PE is 28.

Fibre cement products manufacturer James Hardie Industries plc (ASX: JHX) was added to the S&P ASX 50 Index (ASX: ^XAF) in March. This will potentially open up more institutional investing for the stock and is a sign of the growing stance of the business.

It also experienced a dip in annual revenue since 2010, but is beginning to recover. Its products such as Hardiplank are used for both house and unit construction, so it can take advantage of both markets.

It reported its FY2014 third quarter underlying net profit as US$92.2 million, almost triple on the 3Q FY2013. This is on top of the $108.3 million in underlying net profit it achieved in the first half of FY2014. About 70% of group revenue is from the US, so the recovery of the housing market there has greatly benefited the company.

Since April 2013, the stock is up about 41% to $13.60. It hit a high of $15.20 in early March and has pulled back about 10% since then.

Foolish takeaway

I would expect there is still more growth to be seen in housing construction in Australia. The rise has been going on for about 16 months since mid-2012. However, the stocks are cyclical so investors must look out for the stocks peaking before the housing market does.

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

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