It's fair to say Reece Ltd (ASX: REH) shares have had a bit of a flogging over the past 12 months.
The shares were changing hands for $11.47 on Thursday, down from the 12-month high of $26.70 they had reached late last year and not far from their lows of $10.14.
The analysts at Jarden have had a look at the stock, and have initiated coverage on Reece with a neutral rating, but they still think there's some upside to be had.
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Soft US market an issue
Reece is a major player in the supply of bathroom, kitchen, and air-conditioning parts in Australia, New Zealand, and the US, and was valued at $7.48 billion at the close of trade on Wednesday.
The Jarden team say in their note to clients published this week, that the US business has "strong structural appeal, with gross margin gains validating a differentiated model''.
But there are some near-term risks for the company, including a softer US housing market, limited margin recovery across Australia and New Zealand, and an ongoing loss of market share in the US waterworks division.
Jarden analysts said about 80% of the company's US revenue is tied to new construction, which was forecast to decline by 7% over this calendar year.
As they write in their research note:
US building activity remains weak, constrained by higher mortgage rates, limited inventory turnover, and ongoing skilled labour shortages. Single family starts are down more than 30% from the pandemic peak. Even the South, Reece's core region and an historical long-term outperformer has slowed.
Jarden's analysts say conditions are particularly challenging in Texas, which is home to 41% of Reece's outlets.
Looking ahead, the US housing backdrop is likely to remain a headwind for Reece's near-term earnings. Elevated mortgage rates are expected to persist for longer, keeping affordability constrained and limiting new construction activity. While sentiment around a recovery has improved at times, the underlying fundamentals remain weak, based on our assumption.
In the local market, Reece's sales growth has been weaker than in the US, according to Jarden's team, but despite this, Australia and New Zealand still account for approximately 62% of earnings due to higher margins.
Consensus expects this imbalance to continue, likely making Australia and New Zealand trading dynamics critical to near-term profitability.
Shares still undervalued
While the Jarden recommendation is neutral, their price target of $12.30 indicates there's still money to be made buying Reece shares.
And once dividend returns are factored in, the total projected shareholder return rises to 7.7%.
Reece will hold its annual general meeting on November 21.
