Corporate earnings have proven to be resilient during these turbulent times, but there may be an S&P/ASX 200 Index (ASX: XJO) share that is about to issue a profit warning.
The company in question is cement and lime producer Adbri Ltd (ASX: ABC), according to Morgan Stanley.
The broker's pessimistic view follows a profit warning issued by Boral Limited (ASX: BLD) due to adverse weather. Higher energy costs were another headwind.
Dark clouds over the Adbri share price
The devastating floods in New South Wales and Queensland were a blow to the sector. Plus, the bad weather could persist for a while yet — and the same could be true for energy costs.
"The five capital cities collectively recorded higher numbers of rain days in the quarter ending Mar 22 vs prior year's corresponding period," Morgan Stanley said.
"The increase in rain days was primarily driven by a wet February and March, particularly in Sydney and Brisbane, which have so far recorded 37 and 23 rain days respectively."
Not all ASX 200 building shares are built the same
The broker reckons Adbri is most at risk. This is because of its exposure to construction material, which is most impacted by the weather.
What's more, NSW and Queensland account for around 36% of Adbri's earnings. For these reasons, Morgan Stanley has cut its FY22 earnings before interest and tax forecast by 5% to $213 million.
This, in turn, prompted the broker to downgrade the Adbri share price to "equal-weight" from "overweight". It also lowered its 12-month price target to $3.40 from $3.60 a share.
On higher ground but also facing headwinds
On the flipside, the broker believes the CSR Limited (ASX: CSR) share price is better placed to weather the storm. It says strong housing activity offers CSR better protection in the short term.
"We believe that the building products end of the spectrum will be better able to smooth wet weather impacts," added Morgan Stanley.
"However, we believe the near-term upside is largely reflected in the current share price, with ~9% upside to our A$6.60 PT [price target].
"Interest rates are likely to create a sentiment headwind as CY22 progress and prompt medium-term caution."
The broker has an "equal-weight" rating on the CSR share price.
What is priced in the Boral share price
As for the Boral share price, market expectations have been rebased following its disappointing market update.
But this doesn't mean investors should be rushing out to buy its shares either, noted Morgan Stanley.
"In spite of the recent earnings downgrade and short-term challenges, we see opportunity from improving macro dynamics, cost-out and property," said the broker.
"We believe all of this has been priced in, and as a result, BLD currently trades only 5% above our price target of A$3.20."
Morgan Stanley's rating on the Boral share price is "equal-weight".
