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Why James Hardie’s share price can set another record next month

The James Hardie Industries plc (ASX: JHX) share price is hovering close to a record high but the stock could be poised to rally further in the near-term, according to one leading broker.

Shares in the building materials supplier gained 0.3% to $30.38 on Tuesday when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lost 0.2%. This in only just below the record high of $30.44 that the James Hardie share price hit last Friday.

But Morgan Stanley thinks there is a 70% to 80% chance the stock will be setting new records by next month.

4 bullish reasons

“This is because we expect consensus upgrades heading into the 3Q20 result (Feb 12, 2020),” said the broker. “We see four reasons why consensus earnings are likely to rise.”

The first is the strong US housing data, which set a record of its own in December and came in well ahead of expectations.

The second positive factor is further primary demand growth for its products while lower raw costs of pulp and freight will also give James Hardie’s earnings a boost, noted Credit Suisse.

The fourth reason for the share price to trade higher in the next 30 days is increasing investor confidence in management.

Top ASX pick

Morgan Stanley isn’t the only one that’s bullish on the stock. Citigroup rates James Hardie as its top pick to ride the US housing market even though Boral Limited (ASX: BLD) and Brickworks Limited (ASX: BKW) provide exposure to the US as well.

“December housing starts were up 41% y/y and 17% m/m with lead indicator, housing permits, remaining above 1,400k levels,” said Citi.

“Continued strength in starts place upside risk to our forecast of a steady US housing recovery.

“Of the three, JHX provides the highest leverage with its US business accounting for c76% of FY21F operational EBIT [earnings before interest and tax], with residential starts representing c40% of NAM system growth (single family c30%, multi-family c10%, R&R c60%).”

Foolish takeaway

I share the same bullish sentiment towards James Hardie and I don’t think the stock will run out of puff in the near-term.

But this isn’t the only building materials stock that I think will do well in 2020. I think there is also room for the BlueScope Steel Limited (ASX: BSL) share price and CSR Limited (ASX: CSR) share price to run higher in 2020.

The latter isn’t exposed to the US but the ongoing housing price recovery in Australia bodes well for the group.

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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited and James Hardie Industries plc. Connect with him on Twitter @brenlau.

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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