Why the James Hardie Industries plc share price is soaring 

Credit: stratman

Fibre cement building products maker James Hardie Industries plc (ASX: JHX) enjoyed a soaring share price in today’s trade on the ASX.

The James Hardie share price rose briefly by more than 10% shortly after this morning’s open. The rise boosted James Hardie’s value to levels unseen for more than three months. Could 2016 see James Hardie shares retest the all-time high they hit in August last year?

Why did this happen to James Hardie Industries shares?

This morning, James Hardie announced that in the nine months ending 31 December 2015, it earned US$185 million of adjusted net operating profit. That’s 13% more than the firm earned in the period one year earlier.

More pleasingly, profit for the last three months of the period rose 16% compared to the quarter one year earlier. James Hardie CEO Louis Gries pinned the profit acceleration on ‘higher volumes and lower production costs within our North America and Europe fibre cements business.’

Mr Gries struck a cautiously optimistic tone in his outlook. Although he highlighted that US housing activity has been improving, he cautioned that ‘market conditions remain somewhat uncertain and some input costs remain volatile.’

Currency movements typically have a stronger effect on James Hardie’s share price than on other ASX-listed firms. That’s because most of its profit comes from its North America and Europe businesses.

Investors looked through the currency fluctuations today and gave their approval to James Hardie’s healthy profit margins and to management’s new and improved guidance for its annual result. For the year ending 31 March 2016, James Hardie expects adjusted net operating profit of between US$240 million and US$250 million.

That’s a tighter target than the US$230 million to US$250 million management indicated as recently as November. This increasing confidence in its operations has inspired investors to bid up the James Hardie stock price today.

What’s next for James Hardie Industries plc?

James Hardie investors will be hoping that input prices and the exchange rate between the Aussie and US dollar remain more stable in 2016 than they did last year. If that happens, James Hardie should reap the full benefit of a US housing construction market that continues to improve.

However, investors will pay close attention to James Hardie’s profit margins. If it emerges that James Hardie is sacrificing its pricing power in the pursuit of volume growth and market share, investors may re-rate the stock downwards.

Foolish takeaway

ASX investors have several choices of large stocks exposed to commercial and housing construction — among them, Adelaide Brighton Ltd. (ASX: ABC), Boral Limited (ASX: BLD) and CSR Limited (ASX: CSR).

Their sensitive exposure to the economic cycle can make these stocks quite risky. If you’re considering an investment in James Hardie Industries, you need to add currency risk to that economic risk.

That makes James Hardie an appropriate stock for investors looking for higher risk and potentially higher return.

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Motley Fool contributor Tim Dohrmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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