Building Supplies Offer Shelter from the Housing Storm

by: Judy Weil

Apparently not all segments of the housing industry are doing badly. Home Depot (NYSE:HD) jettisoned its building supply company early on in the housing slump, and USG (NYSE:USG) has reported poor numbers this quarter.

Beacon Roofing Supply's (NASDAQ:BECN) quarterly results bear the Home Depot trend out, but what about USG? Beacon says complimentary building products like nicer doors and decks are not faring well, but people will always need a roof over their heads. From Beacon Roofing Supply’s FQ408 conference call:

Roofing product sales benefited from unusually large and frequent rises in price during the fourth quarter, mostly in residential shingles. We also saw strong re-roofing activity in storm-affected regions and continued growth in commercial roofing activities in most markets… The storm-related demand is normal for our industry, the only difference being that in fiscal ’07 we had none…

Commercial roofing activity continued to grow despite the recent drop-off in new construction which we believe reinforces the importance of re-roofing… in commercial re-roofing is actually a bigger part of that segment than residential. Re-roofing is about 80% of the commercial business. I would expect that new commercial construction would decline and we will get our growth in that area from re-roofing and there’s always the possibility of price increases… In ’09 we’ll work hard to emphasize re-roofing in that area.

The commercial… companies are not financially based as much as you would expect. They don’t have big bank loans. They live job to job and we live job to job with them and provide them with the credit they need to carry them over from the jobs as they get paid themselves.

Not immune, but ‘resistant’:

Complimentary product sales which we believe are much more discretionary in nature than roofing products continued to be negatively impacted by both the slowdown in the economy and lower levels of new residential construction… We’re not immune from the recession but we are recession resistant because of the nature of the products.

Bad debt expense increased $3.5 million as we experienced higher write-offs and increased our reserves due to the economic and credit climate.

Looking for the industry to improve in H209:

Owens Corning (OWENQ) anticipates second half of ’09 to show improvement in housing starts. The total year may be flat but they think the second half will pick up. I’ve read similar things from others... That appears to be the general consensus.

We’re comfortable with the analyst ranges at this point in time. While we believe we will enjoy some sales and profit benefit from our 2008 price increases in Q1 and Q2, we will be up against tough comparisons for Q3 and Q4 of next year… We are pleased the results through November with October [are] especially healthy.

Our competitors are doing well. It’s almost an answer that you do region by region and even branch by branch but we have good competitors. I think they’re doing really well at this point.

Effect of oil prices:

Q: It seems like asphalt costs remain at very high levels despite the drop in oil prices so it seems unlikely they would be lowering prices any time soon.

A: Actually you’re correct. Asphalt prices have held up mainly because asphalt is not the primary thing that the refineries like to make and there have been some shortages regarding asphalt.