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Why the James Hardie share price is surging to record highs

Building products supplier James Hardie Industries plc (ASX: JHX) is the best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index this morning after it reported a big increase in earnings.

The James Hardie share price raced 7.2% higher to a record high of $26.48 and is sitting on top of the leader board with the Xero Limited (ASX: XRO) share price in second spot on a 5% gain at $70.87 and the Clinuvel Pharmaceuticals Limited (ASX: CUV) share price a little behind with a 3.2% increase to $30.13.

More than a big jump in profit

James Hardie reported an adjusted net operating profit (NOPAT) of US$98.6 million for the September quarter and US$188.8 million for the half year. The quarterly profit is 22% increase over the same time last year and the half year number is 17% ahead of 1HFY19.

But the profit jump isn’t the only thing exciting investors. The group reported improvements across all key markets and margins are expanding.

Total first half adjusted earnings before interest and tax (EBIT) jumped 21% to US$258.6 million as interim revenue improved 2% to US$1.3 billion.

Margin expanding in difficult market

What’s more the margin expansion is accelerating. Management reported that EBIT margin for the North America Fibre Cement Segment EBIT, the Asia Pacific Fibre Cement business and the Europe Building Products division are higher in the September quarter versus the half year.

“Our North America Fiber Cement segment delivered another quarter of very strong volume growth in a down market while generating a very strong quarterly EBIT margin of 27.1%. Our commercial transformation started to gain traction in the first half,” said James Hardie chief executive Jack Truong.

“Our Asia Pacific Fiber Cement segment delivered very good financial results, both Net Sales and EBIT grew in the quarter in local currency, despite a contracting Australian housing market.”

FY20 earnings tipped to jump significantly

Management also released pleasing FY20 guidance. Adjusted NOPAT is tipped to jump to between US$343 million and US$362 million. This compares to FY19’s figure of US$300.5 million and analysts’ forecasts of US$343 million and US$362 million.

While conditions in Australia and Europe remain soft, James Hardie believes it will win market share.

“In Australia, we anticipate that our addressable underlying market will continue to experience high single digit percent contraction in fiscal year 2020 compared to fiscal year 2019,” said Dr Truong.

“We expect volume from our Australian business to continue to grow above the market.

“We expect our Europe Building Product segment to achieve year on year net sales and EBIT margin growth. In Europe, we expect that our addressable underlying market in fiscal year 2020 will decrease slightly compared to fiscal year 2019.”

There is more optimism for the US market. Residential construction should register modest growth and management is forecasting new construction starts of around 1.2 million to 1.3 million for FY20.

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