Why the share price of Boral Limited is getting smashed despite forecasting strong growth

The share price of Boral Limited (ASX: BLD) collapsed to a six-month low after management warned that its US operations have not been performing to expectations.

The news caused the stock to crash 9% to $6.85 this morning even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) added 0.4%.

Boral may also be dragging on the sentiment towards other building materials companies including James Hardie Industries plc (ASX: JHX), which also has significant exposure to the US market, with the stock giving up 1% to $23.50.

Meanwhile, sector peer CSR Limited (ASX: CSR) and Adelaide Brighton Ltd. (ASX: ABC) are also trading in the red.

Boral tried to put a positive spin on the news by stating that it had sold its Prospect Masonry property in New South Wales, which will add around $56 million to its earnings before interest, tax, depreciation and amortisation (EBITDA) in FY18.

“Boral now expects a total EBITDA contribution from Property in FY2018 of approximately $55 million to $65 million, with the sale of the Prospect site having progressed earlier than expected,” the company said in a statement to the ASX.

“Boral’s Property pipeline is robust, and a more detailed update of the current pipeline will be presented at Boral Australia’s investor day scheduled for 16 May.”

Management tried to reassure investors by pointing out that the strength in its Property division and US President Donald Trump’s corporate tax cut are more than enough to offset the unexpected weakness in its US business in the March quarter.

Boral is blaming bad weather for the poor performance with heavy rain in Texas and through the Midwest, particularly in February, impacting on performance.

The prolonged winter in North America compared to 2017 when spring came early, further impinged on the business.

But Boral can’t blame everything on the weather. The company continues to suffer from “operational issues” that plagued its first half results.

“[The] consolidation of production lines in the Oceanside metal roofing business in California are still being addressed and commissioning costs associated with the Greencastle stone plant continued to impact up until the end of March,” added the company.

“In the Fly Ash business, higher costs associated with repositioning fly ash supply to customers due to the closure of the three utilities in Texas are having a short-term impact.”

These may be temporary factors that are likely to mostly dissipate in the next three to six months, but the update is a big disappointment to shareholders like myself who regard the US business as Boral’s crown jewel.

The poor performance of this division brings into question management credibility even though the weather is partly to blame.

Boral says it will be firing on all cylinders in the June quarter as this tends to be a strong period for its US business and management is tipping better momentum in its Australian operations as well.

The company is forecasting EBITDA growth of around 10% to 20% in FY18 for its Australian division while US division is tipped to generate EBITDA growth of between 10% and 25% in the second half compared with the previous half.

The market’s patience is being tested, but for now, I am willing to give the company a little more time to prove itself.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited. 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 Scott Phillips.

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