Give Boral Limited (ASX: BLD) enough rope and it'll hang itself. That's probably the best way to describe one of 2019's large cap re-rating hopefuls following its latest debacle.
News of accounting irregularities at the building materials group's US windows business caps a disastrous year for management and prompted JP Morgan to downgrade its recommendation on the stock to a "underweight" (or "sell").
The Boral share price fell 0.4% to $4.59 in morning trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index increased 0.3% on optimism of a US-China trade agreement before the year-end.
No turnaround in sight
Today's fall means Boral's shares have retreated 6% since January, or around 26% behind the broader market. It doesn't look like there's a turnaround in sight either.
"We are increasingly concerned about the outlook for BLD's North America division," said JP Morgan.
"Including last night's announcement regarding recent financial irregularities, we estimate underlying EBIT [earnings before interest and tax] for the division from continuing operations has been broadly stable from pro-forma FY17 to FY19, despite c.$74m of synergies from Headwaters and Meridian.
ROFE [return on funds employed] for North America now looks to have been shy of 5% in FY19, raising the risk of impairments at some point. Boral Australia is a better quality business, but the cycle is working against it."
Is Boral cum-cap raise?
The risk that Boral will have to undertake a capital raise is increasing also, adding another pressure point to the stock.
Earlier this year I thought Boral would outperform from its US acquisition of Headwaters and a rebound in US home construction. But management issued a string of profit warnings instead.
Boral's embattled chief executive Mike King is digging in despite mounting pressure for him to be ousted from a role he's held for more than seven years.
I think the stock will continue to struggle until a viable replacement is announced as too many things have gone wrong under his watch. The need for a cap raise will probably seal his fate, if I had to guess. Shareholders would be reluctant to provide new capital to old management.
Better buys for 2020
Those wanting exposure to US and Australian construction activity will be better off backing the likes of BlueScope Steel Limited (ASX: BSL) and James Hardie Industries plc (ASX: JHX). Both stocks look well placed to end 2019 on a high and their outlook for next year looks favourable.
That's more than we can say about Boral. JP Morgan cut the group's earnings per share forecasts by 10% on average for FY20 to FY22. The broker's price target on Boral is $4.25 a share.
