The housing industry is basically the only bright spot in the Australian economy, fuelled by record low interest rates that might just go lower. If the RBA sets cash target rates to 2% or even lower to pump prime business growth, that will spur on more housing construction.
Likewise, the U.S. housing market is making a recovery. The U.S. Federal Reserve Bank may have stopped its quantitative easing (QE), but there interest rates are also being kept really low to stimulate the economy.
There is one Australian company with significant business both here and in the U.S. that investors should know about.
James Hardie Industries plc (ASX: JHX) is known for its fibre cement housing construction products like Hardiplank used for siding, panels and roofing. The company is seeing improvement in its second quarter of FY 2015. Group net sales were up 12% and adjusted net operating profit rose 16% due to higher earnings margins.
That helped pull up half-year results with interim adjusted net operating profit up 7%. Housing starts, a leading indicator of construction, are still low in the U.S. compared to pre-GFC levels, but that could improve over the next several years since U.S. GDP is rising close to 3%.
About 74% of the company's revenue is from the U.S. and Australia accounts for around 17%, so it stands to benefit over the mid-term as both countries are keeping interest rates as accommodating as possible. The stock pays a decent 3.2% yield and its price-earnings to growth (PEG) ratio is astonishingly low.
This is surprising since consensus earnings growth forecasts indicate very high double-digit annual growth over the next two years. This could be because investors may not be convinced the U.S. housing market will improve so well. It could also be partly from the compensation payments it must make to people who have asbestos-related illness due to exposure to the company's older products.
Although James Hardie does have some interesting prospects, I am not quite convinced that this is the time to go heavily into it. As a cyclical stock, even though revenue and earnings may continue to rise, early investors may move on to other industries if they think the housing industry is close to a cyclical peak.
