The Boral Limited (ASX: BLD) share price is staging a comeback after several top brokers voiced their view that the sharp sell-off in the stock yesterday was an overreaction.
Boral's share price has reversed course and is rallying 2.3% to $5.64 when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is struggling to keep its head above breakeven.
This is in sharp contrast to the stock's 2% loss on Tuesday when management issued a disappointing update at its annual general meeting (AGM) as wet weather and hurricanes in the US impacted on its bottom line.
But this is probably a good time to be buying the stock. Citigroup is one of the brokers that have come out to upgrade the stock today as it moved its recommendation on Boral to "buy" from "neutral" after the stock shed nearly 30% of its value since the start of this calendar year.
The broker noted that management is largely sticking to its FY19 earnings guidance even though the company removed some of the more bullish expectations around profit growth that was included in its full year results announcement two months ago.
"In spite of recent market concerns, BLD remain bullish on the US housing cycle, pointing to housing starts YTD being up 5-6% and the current cycle being one of the slowest recoveries since WWII," said Citi who has a $7 a share price target on the stock.
"With housing starts expected at c1.3m in FY19 (+5% y/y), BLD expects the market to continue to rise toward 1.5m starts, before peaking (record peak at 2.1m). In our view, undersupply has been a key driver behind the issue of high US house prices."
Even Credit Suisse, which had held a more bearish view on Boral in the past, was prompted to upgrade the stock to "neutral" from "underperform" on valuation grounds.
"We make minor changes to earnings, noting that our prior EBITDA [earnings before interest, tax, depreciation and amortisation] forecast was 3.5% below consensus and at or below guidance," said Credit Suisse.
"We upgrade to NEUTRAL, with a 2SD [standard deviation] discount to long-term P/E averages arguably pricing in much uncertainty."
However, there's a risk that Boral may need to issue a profit warning if the weather doesn't start to cooperate soon.
But even then, some brokers question if Boral can meet its guidance as that will require a very strong showing in the second half of FY19.
The trouble is US housing construction data is trending down and some of its peers have given a cautious outlook for the next six months, although I think this risk is already in Boral's current share price.
Boral isn't the only way to gain leverage to the US economy and the stronger for longer US dollar. It's peer James Hardie Industries plc (ASX: JHX) as well as Reece Ltd (ASX: REH), Reliance Worldwide Corporation Ltd (ASX: RWC) and Amcor Limited (ASX: AMC) are attractive alternatives in my opinion.
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