A weaker-than-expected profit guidance sent stock in James Hardie Industries plc (ASX: JHX) tumbling to its lowest level since July this morning.
The US-exposed building materials company said that it expected net profit for the year ending March 2016 to come in between $US240 million and $US270 million ($326-$367 million), when the average analyst forecast is at the top-end of that range. The company posted a net profit of $230.7 million in 2014-15.
That's not necessarily a big negative for a company's share price, except of course when it's trading at a healthy premium to the market like James Hardie.
The stock tumbled 3.1% to $17.39 in early trade but that still puts it on a lofty consensus price-earnings multiple that's well over 20x for the current financial year – and this multiple will be higher unless James Hardie delivers a profit right at the top of that guidance range.
There's little room for error and the company is lucky that it has a number of tailwinds supporting its business. Firstly, lower input and freight costs along with the company's cost-cutting initiatives are bolstering margins.
Management even thinks that earnings before interest and tax (EBIT) and the EBIT margin for the US and Europe fibre cement business could exceed its target range of 20% to 25% for the current financial year.
Further, the US economy is looking like the most robust of all developed economies as employment and industrial production are trending in the right direction.
More importantly, the US housing market continues to strengthen after taking a savage beating during the global financial crisis.
Then there's the faltering Australian dollar, which a number of currency experts believe will weaken further against the US dollar over the next 12 months.
While a weaker Aussie won't impact on company guidance as it is given in US dollars, it will improve the investment metrics of the stock because it's priced and pays dividends in Australian dollars.
However, will these drivers be enough to drive a 17% increase in 2015-16 net profit, which is needed if James Hardie is to be spared a consensus profit downgrade?
I think James Hardie can achieve that given its solid June quarter result that showed a 27% increase in adjusted net profit to $US63.5 million on the back of a 3% increase in sales to $US428.3 million.
The morning's sell-off looks like a bit of an overreaction to me, although I think there's better value to be found elsewhere as the stock looks close to fair value.
