This ASX 200 stock just slashed its earnings guidance by 17%

In a housing crisis, how is this company now facing lower profits than previously expected?

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The Australian share market is tipping into the red this morning but nowhere near the extent of one hard-hit ASX 200 stock.

Fletcher Building Ltd (ASX: FBU) sent out a market update before the market lurched into motion. With shares down 9.6% to $2.91, shareholders are evidently not pleased with the contents. For context, the S&P/ASX 200 Index (ASX: XJO) is starting the week 0.13% lower.

Let's look at the negative nudge hurting Fletcher Building today.

'Challenging conditions' cut down forecast

Investors are reassessing the home builder as light is shed on the current industry landscape.

As per the release, Fletcher highlighted 'weakened' market conditions in its materials and distribution divisions — think insulation, plasterboard, roofing, and retailing said products — sending the ASX 200 stock into freefall.

Volumes in New Zealand are down approximately 5% to date in the second half of FY2024 compared to the second quarter. Meanwhile, Australia is the harder hit of the two, with volumes impacted to the tune of 10%.

Fletcher pointed out a 'notable slowdown' in house sales and 'an end to the house price momentum' previously witnessed throughout the first half in New Zealand as a cause for the weakness.

Today's update lands 11 days after Australian building approvals data published by the Australian Bureau of Statistics.

The March figures show a 2.2% decline in seasonally adjusted total dwelling units approved year-on-year. Meanwhile, the fall for private sector dwellings excluding houses deepens to 16.8%, as depicted below.

Source: Australian Bureau of Statistics, March 2024 Building Approvals, Australia

In light of the sector's softening, the ASX 200 stock has revised its FY2024 earnings before interest and taxes (EBIT) guidance.

The company's previous estimate was between $540 million to $640 million. Now, Fletcher expects FY24 EBIT before significant items to land between $500 million and $530 million. It marks a 17% reduction from the top-bound estimate.

Furthermore, Fletcher highlighted gross margin pressure across Iplex NZ and Steel.

What could be next for this ASX 200 stock?

Citi analysts have quickly cast their judgment following Fletcher's guidance downgrade.

The team believes there is a risk that the building company may tap investors for money through a capital raise, stating:

A soft trading update that appears to increase leverage outside the range expected.

Given the potential quantum of the unknowns, we retain our sell rating and believe it may be prudent for a new CEO to shore up the balance sheet.

As of 31 December 2023, Fletcher held NZ$2.18 billion of debt on its balance sheet. Whereas the cash pile stood at a relatively meagre NZ$215 million.

Citi is sticking to its sell rating despite the ASX 200 stock being down 34.5% from a year ago.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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