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Weak Components Segment, Harvey to Dent NCI Building Results


On Sep 13, we issued an updated research report on NCI Building Systems, Inc. NCS. The company’s near-term results will be affected by lower volumes in the legacy Components segment due to continued weak market activity, anticipated impact of Hurricane Harvey and higher restructuring costs.

Earnings Miss and Lag in Q3, Trimmed Guidance

NCI Building posted adjusted earnings of 27 cents per share for third-quarter fiscal 2017 (ended Jul 30, 2017), down 18.2% from 33 cents recorded in the prior-year quarter. Earnings also missed the Zacks Consensus Estimate of 31 cents. For fourth-quarter fiscal 2017, the company anticipates revenues to be in the range of $470-$500 million.

Adjusted EBITDA is projected to be in the range of $48-$62 million. This includes an estimated impact of $3-$8 million related to potential temporary disruptions at customer job sites due to Hurricane Harvey, which may affect ongoing projects or ability in the short term to accept deliveries.

For fiscal 2017, NCI Building lowered revenue guidance range to $1.75-$1.78 billion from the previous range of $1.80-$1.86 billion. The company also slashed the adjusted EBITDA guidance range from $180-$200 million to $162-$176 million. The downward revision reflects the lower volumes due to continued weak market activity, particularly in the legacy Components segment as well as the anticipated impact of Hurricane Harvey.

Low to Moderate Growth for Legacy Business

While leading indicators continue to point to year-over-year growth for low-rise non-residential starts of 3-6%, the company has witnessed a divergence in growth rates of extremely large low-rise structures over 500,000 square feet versus smaller structures within the 2017 year-to-date numbers.

The company’s legacy businesses tend to focus more on these smaller structures (less than 500,000 square feet), which are growing at a slightly slower rate. It expects, based on current backlog activity and leading indicators, low to moderate growth at the lower end of the 3-6% range over the next 12 months for its legacy businesses if this divergence persists.

Higher Restructuring Costs, Lower Oil Prices also Concerns

NCI Building expects to fully execute its plans to enhance cost efficiency, and optimize combined manufacturing footprint in phases. The company also estimates to incur future additional restructuring charges associated with these plans. These charges will affect profitability in the near term.

Weak oil prices are a headwind for the company’s brands that operate in the oil and gas segment. Traditionally, the segment has accounted for 5% of the company’s total revenues.

The company's shares have underperformed the industry it belongs to, in the past year. Its shares have inched up 0.7% while the industry rose 14.2%.

NCI Building currently carries a Zacks Rank #5 (Strong Sell).

Key Picks

Some better ranked stocks in the sector include Owens Corning OC, Sterling Construction Company, Inc. STRL and TopBuild Corp. BLD. While Owens Corning and Sterling Construction sport a Zacks Rank #1 (Strong Buy), TopBuild carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Owens Corning has an average earnings surprise of 20% in the past four quarters. Sterling Construction has an average earnings surprise of 47% in the last four quarters while TopBuild has an average earnings surprise of 10% in the trailing four quarters.

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