The US housing construction market is making a big comeback with housing starts continuing to rebound since middle of 2019.
Housing starts in November in the world’s largest economy jumped 14% year-on-year (y/y) with housing permits (a lead indicator) hitting 12-year highs of almost 1.5 million units, according to Citigroup.
This means housing permits increased an impressive 11% over the same time last year and 1% month-on-month (m/m).
Single family homes the biggest growth driver
The data was stronger than what the market was expecting and it looks like US residential construction will remain robust in 2020.
“Single family starts drove the monthly strength, +17% y/y to 938k (AR) in November, while multifamily starts rose +7% y/y and increased m/m for the second consecutive month,” said Citi.
That stands in contrast with Australia where construction is muted as there is a long lag between the house price recovery and building activity.
Stocks leveraged to US housing
The good news is that ASX investors looking to gain exposure to the rebounding US market have at least three choices. The building materials groups with a presence in that market and covered by Citi include James Hardie Industries plc (ASX: JHX), Boral Limited (ASX: BLD) and Brickworks Limited (ASX: BKW).
“Of the three, JHX provides the highest leverage with its US business accounting for c76% of FY21F operational EBIT, with residential starts representing c40% of NAM system growth (single family c30%, multi-family c10%, R&R c60%),” said the broker.
“For BLD, its NAM construction business accounts for nearly half of FY21 group EBIT, while BKW’s recent US bricks acquisitions sees c10% of group EBIT tied to US residential (and commercial) markets.”
James Hardie is the broker’s top pick and the only one of the three that it’s recommending as a “buy”. Citigroup’s target price on the stock is $30 a share.
The stock is also my top pick in the building sector as Boral’s poor management track record will leave its shares struggling until there is some meaningful change.
However, these aren’t the only ASX shares that can benefit from US housing growth. Plumbing solutions group Reliance Worldwide Corporation Ltd (ASX: RWC) is another that tends to move with sentiment towards the US housing outlook. This is despite the fact that its products aren’t typically used in new home construction.
Steel products group BlueScope Steel Limited (ASX: BSL) also enjoys some exposure to the market, although its earnings are more leveraged towards commercial and infrastructure construction.
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Brendon Lau owns shares of BlueScope Steel Limited and James Hardie Industries plc.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended Brickworks and Reliance Worldwide Limited. 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.