James Hardie Industries plc

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

James Hardie is a global leader in the manufacture of fiber cement building products, offering a range of interior and exterior solutions across multiple regions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: James Hardie Industries plc (JHX), a global company headquartered in Ireland, is the leading manufacturer and marketer of high-performance fiber cement and fiber gypsum building solutions. The company operates across several regions including North America, Asia Pacific, and Europe. Their products are used in a variety of building applications, including siding, walls, ceilings, and floors. While their products are sold internationally, they are heavily used in building in North America, Australia and New Zealand. James Hardie utilizes its proprietary technology to create products that are more durable and lighter than competitors’ materials, giving the company an edge in product performance and transportation costs. They are known for the AESTUVER® brand.

Revenue Distribution: James Hardie reports its revenue under three main segments:

  • North America Fiber Cement: Includes manufacturing and sales in US and Canada.
  • Asia Pacific Fiber Cement: Includes manufacturing and sales in Australia, New Zealand, and the Philippines.
  • Europe Building Products: Primarily fiber cement and fiber gypsum products in Europe.

In FY2023, the North America Fiber Cement segment accounted for 60% of the company’s revenue, Asia Pacific Fiber Cement accounted for 28%, and Europe Building Products accounted for 12%.

Industry Trends:

  • The building materials industry is susceptible to economic cycles. JHX’s results are closely linked to the health of residential and commercial construction markets.
  • There’s a trend towards increased usage of sustainable materials in construction, which should benefit JHX’s fiber cement offerings.
  • The company has shifted a strategic focus towards marketing direct to homeowners and contractors, and also improving its online presence.
  • There is growing demand for durable and low-maintenance building materials.

Competitive Landscape:

  • The building products industry is characterized by intense competition based on price, quality, and brand recognition.
  • While there are large companies, like Johns Manville and CertainTeed, the industry is also made up of a fragmented group of smaller companies with limited differentiation.
  • JHX competes with products made from natural and engineered wood, vinyl, stucco, and other materials.
  • In some regions they are the largest provider of fiber cement products for exterior use.

Competitive Advantages (Moat):

  • Strong Brand Recognition & Reputation: The James Hardie brand is well-known and respected within the building industry. Their products are trusted and their distribution relationships are strong. They operate as an industry leader, and have an established brand name.
  • Proprietary Technology & Product Innovation: The company utilizes specific and advanced technology in manufacturing, creating a difficult hurdle for competitors who would try to replicate the unique characteristics of their products.
  • Established Distribution Channels: They have a network of distributors and dealers that makes their products readily accessible, which creates a barrier to entry.
  • Scale & Manufacturing Expertise: Their production capabilities are considerable, allowing for cost efficiencies and a large market presence, specifically their use of automated systems and production facilities.
  • Location-based advantages: Their production facilities are located strategically to serve their customers efficiently.

Moat Rating: 2.5 / 5

  • The moat is narrow to moderate,. The brand is strong and there are clear advantages in manufacturing and distribution, especially in their core markets (North America and Australia). However, there is constant technological innovation and other sources of competition in the building materials industry, making moats somewhat vulnerable over time. Also, some parts of their operations (like some European sales) face issues like volatile energy markets, which can disrupt their performance.
  • In terms of durability, the moat appears durable in the near-term, but may become less so in the long-term because of emerging technologies and materials, and it may be difficult to maintain cost advantages over the long run, as well as high ROIC.

Key Financial Metrics:

  • Net sales:
    • FY24 (Fiscal Year ends at March): US$3.9 Billion. This reflects an increase of 5% compared to FY23, primarily driven by price increases as demand has decreased slightly.
    • The price increase strategy was implemented to offset increase production costs.
  • The growth in sales revenue was driven by a price and mix strategy (increased prices on products) with volume remaining soft across major markets.
  • Adjusted Net Income:
  • FY24: US$506 Million. An increase of 32% compared to FY23.
  • This significant improvement was primarily caused by improving margins, partially offset by increased SG&A costs.
  • Operating Income Margin:
    • FY24 (adjusted): 18.2%. An increase from 14.6% in FY23.
    • This reflects an overall improvement in gross margins, and efforts made to optimize operating costs.
    • Management believes that further operating margin improvements are achievable.
  • Return on Equity (ROE):
    • FY24: 27.2%, this shows significant improvements from the past.
    • The large YoY rise shows how well the company has been able to deploy capital to produce profits.
  • Return on Invested Capital (ROIC):
    • FY24: 48%, down from previous years.
    • In other words, the management is investing a lot and getting great value for each dollar deployed.
  • Leverage: The net debt-to-equity ratio is 0.59, which means the company has more assets than it does debt. The weighted average interest rates are 6.1% for long-term, and 4.0% for short-term.
  • Dividends: The company maintains a consistent dividend payout.

Financial Analysis

  • Growth and Profitability: The growth in net sales and profits in FY24, along with strong margins, demonstrate that the company is a reliable and consistent performer.
  • The business is more reliant on price increases than it is on volume growth, which is also a point of caution as this is hard to maintain in highly competitive industries. They are expecting to grow at a modest rate (in the low single digits), which isn’t ideal for those who want high growth.
  • While volume growth is low, pricing power has been strong due to a well established brand that is in demand.
  • Financial Structure: The capital structure is still healthy as of the most recent reports, but some concerns have been raised regarding a decrease in ROIC (as discussed later in this section), and an increase in leverage.
  • There have also been a few recent comments regarding them needing to take on additional debt to fund investments. While not an immediate cause for alarm, it still should be taken into account.
  • Financial Reorganization and Changes: They have shifted their business to align under global segments and global strategies. This is in response to them not fully controlling the operations of all subsidiaries and instead giving greater operating autonomy to the business units.

Risks & Concerns:

  • Industry Cyclicality: The building industry is cyclical, so JHX’s sales are affected by construction activity. This makes their financials somewhat hard to predict.
  • Competition: Companies may continue to aggressively compete on price, or invent a new process or product that undercuts them. Some of the other big competitors like CertainTeed, Knauf, and others are all well funded and have large operations to potentially attack JHX’s market share.
  • Impact of Housing Market Slowdown: The rising interest rates and economic slowdown have reduced housing starts, which is negatively affecting the demand for building materials, especially in North America and Australia.
  • While most of their sales were related to repair and remodelling instead of new constructions (which should prove more resilient) both are impacted by recessions.
  • Price Volatility and Raw Materials: There has been some turbulence with prices of raw materials, which is being passed onto the consumer but may still affect margins if pricing power weakens.
  • Labor Costs: As labour has become more in demand in recent years, they have also had to pay higher employee compensation, which has affected SG&A expense.
  • Currency Risk: The company operates in numerous geographical regions and is heavily exposed to changes in foreign currencies that can negatively impact sales. For instance, the rising USD made their Australian and European revenues less profitable.
  • Legal and Regulatory Risks: It’s very difficult to evaluate JHX’s exposure to asbestos-related litigation. Even the AIF (Asbestos Injuries Compensation Fund) can require large payments from JHX at any time. Any legal hurdles can significantly impact their operations. The most recent cases in New Zealand seem to imply that they have substantial legal risks that the management has to account for. Also, legal expenses are not included in operating income, further obscuring the real business performance.
  • Leverage: There is some debt as part of the capital structure, and rising interest rates can cause debt servicing costs to rise.
  • Stock dilution: There has been talk of issuing more stock to fund acquisitions or other ventures, this may lead to dilution of ownership.

Management’s View & Responses:

  • The management has mentioned that while volumes are below where they want them to be, they have offset some of these with price increases, and they expect the volume side of their business to pick up in the coming years.
  • Management understands that they will not meet their previous profit guidance and have made some concessions. They are targeting a 10-15% ROIC.
  • They intend to lower expenses by streamlining operations.
  • They expect margins to increase due to price increases.
  • They have stressed that they are a long-term value investor and plan to take a long term view when it comes to the business.
  • They have mentioned that they are exploring organic and inorganic methods to create long term value and returns.
  • They have stated that even though high inflation has negatively impacted the cost of operations, they have been able to offset it with price increases.
  • They have been making changes to their business to account for currency risk, as it has been a major factor impacting profitability over the last few years.

Understandability: 3 / 5

  • The core business is easily understood: manufacture and sales of building materials.
  • Understanding the nuances of the industry, and all the different factors that go into long-term value creation, can be very complex. Also, the reporting of their numbers with the adjustments for currency translation is very confusing. The nature of multi-national operations makes it more complex.
  • The financial statements are extremely detailed and require significant time and expertise to understand.

Balance Sheet Health: 3 / 5

  • While they have a decent debt to equity ratio, it is not ideal, especially given the uncertain nature of the markets. They have also had to increase debt recently to fund further operations, and have announced buy backs despite the high debt.
  • The biggest problem the company has is with litigation liabilities and their uncertain payouts. These are very difficult to estimate and can have large impacts.
  • Their short-term investments are mostly in highly-rated government bonds, implying that short term liability requirements can be easily met, although they have also started investing heavily in a fund designed to offset asbestos related litigation.
  • Goodwill and intangible assets are reasonable.
  • The company has reasonable liquidity and is able to meet short-term obligations as of most recent report.

Overall, while James Hardie operates in an industry with many competitors, they have carved out their niche and are able to do pretty well and generate consistent profits. However, there are many potential risks in the near future that the management must navigate, especially with regards to asbestos liability and debt repayment. Also their high reliance on continued price increases can be problematic if the market starts to reject it.