The James Hardie Industries plc (ASX: JHX) share price more than rebounded from yesterday's sharp losses after a top broker upgraded its shares.
The ASX building materials supplier is "too cheap to ignore", according to Morgan Stanley. The broker upgraded its recommendation on James Hardie to "overweight" from "equal-weight" following the company's results announcement that triggered the sell-off.
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When 36% profit growth isn't enough
The company posted a 36% increase in FY22 adjusted net profit to US$620.7 million which didn't impress the market. As a result, the James Hardie share price tumbled 3.5% on Tuesday although it regained all the loss, and then some, this morning when it surged as high as 6% to $39.79.
At the time of writing, the company's share price has settled at $39.00, 4% higher than yesterday's close.
It wasn't James Hardie's earnings or sales figures that scared investors. If anything, net profit was largely in line with consensus expectations.
Is too much bad news priced into the James Hardie share price?
Yesterday's negative reaction to the James Hardie share price likely stems from worries about the impact of rising interest rates on housing.
Morgan Stanley said:
JHX is a quality business with a true structural growth theme.
Current mortgage rate concerns are valid – but after material recent de-rating, we find housing market weakness more than priced in, particularly given JHX's skew towards R&R [repair and renovation] markets.
Building up to strong growth in FY23
Around 65% of the group's business is from R&R with the balance from new builds. The broker also reckons the company could steal market share to maintain its growth rate.
It also helps that James Hardie has a full backlog of orders that should keep it busy till FY23, if not beyond.
Further, management is sticking to its FY23 earnings guidance for net profit of US$740 million to US$820 million.
It also increased its revenue growth forecast for its North America Fibre Cement (NAFC) business to 18% to 22%. That's up from its original expectation of between 16% and 20%.
Morgan Stanley's 12-month price target on the James Hardie share price is $51 a share.
What other brokers are saying about the James Hardie share price
But the broker isn't the only one that is bullish on the shares. Citigroup and UBS have reiterated their buy call on James Hardie.
Citi acknowledges the risk of rising rates, particularly in the US. But it estimated that only around 2% to 3% market growth is factored into the company's North American sales guidance.
UBS also pointed out that its buy thesis on James Hardie is largely unchanged despite the macroeconomic risks.
The Citi and UBS 12-month price targets on the James Hardie share price are $44.30 and $57.70 respectively.
