October 9, 2017 / 10:36 AM / 8 days ago

Hurricane history favors U.S. building suppliers

A resident of a mobile home park lies near a home that was destroyed by a falling tree in the wake of Hurricane Irma in Kissimmee, Florida, U.S. September 12, 2017. REUTERS/Gregg Newton

(Reuters) - There are 600,000 homes in Texas and Florida alone that need re-roofed or repaired and results over the next month will give some sign of how much the resulting squeeze on building materials will benefit suppliers over the next year.

Shares in firms like USG Corp (USG.N), Owens Corning (OC.N), Eagle Materials Inc (EXP.N), Beacon Roofing Supply Inc (BECN.O) and GMS Inc (GMS.N) have jumped about 10-20 percent since Hurricane Harvey and Irma struck the region a month ago.

But data and industry estimates suggest there may be more to come as sector firms unveil their results for the third quarter and give clearer guidance on the impact on the prices they pay and charge for materials now in high demand.

As the attached graphic shows, the impact of past storms has taken months to work through in the value of suppliers and will typically boost the shares by far more. (bit.ly/2ytLTN0)

“Prior storm events suggest prices can increase 10 percent or more for many kinds of materials, with those price effects moderating in a few quarters and returning back to economic fundamental trends,” National Association of Home Builders (NAHB) Chief Economist Robert Dietz told Reuters.

Local government estimates used by analysts from brokerage Jefferies suggest that around 10 percent of housing stock affected by the storms in the two states requires work.

That should spur low to mid-single digit annual rises in sales volumes for wallboard, flooring, insulation and roofing analysts say.

Up to Wednesday’s close, USG shares are up 18.4 percent since markets began to prepare for an unusually stormy hurricane season, GMS-19.6 percent, OC-18 percent, BECN-15.2 percent and EXP-13.9 percent. Hurricane Harvey struck on Aug. 25.

For comparison, in the six months after Hurricane Katrina’s catastrophic landfall in Louisiana in 2005, shares in USG rose 94.7 percent, Eagle Materials’ 58.6 percent and Beacon Roofing 27.9 percent.

Some supply chain disruptions due to the hurricane could increase raw material costs for manufacturers, tempering some of the benefits that they get from higher demand.

“There are going to be some short term headwinds (for building products companies) due to cost and reduced volumes,” Jefferies analyst Philip Ng told Reuters.

But he also added that the companies should still benefit just because Houston and Florida are very large markets.

“We’re having a hard time keeping anything in stock, and that includes wallboard, plywood, related building products,” GMS Chief Executive G. Michael Callahan said on the earnings call last month.

USG and GMS declined to comment while Eagle Materials, Owens Corning and Beacon Roofing were not immediately available for comment.

EMPTY SHELVES

The other side of the coin is the squeeze on costs and supplies for U.S. homebuilders who are already grappling with a shortage of skilled labor.

“Construction labor is already relatively tight in most parts of the country. So their building effort will likely worsen in an already tight labor market,” Fitch Ratings analyst Robert Rulla said.

NAHB expects repairs to require 10-20,000 construction workers to be redirected or recruited in Texas alone.

“Construction employment typically peaks from 10-12 months after a major storm – so prices (of building materials) should remain high for quite some time,” said Aaron Terrazas, senior economist at online real estate marketplace Zillow.

No. 2 U.S. homebuilders Lennar Corp (LEN.N) said on Tuesday it expected its fiscal fourth quarter gross margin to be negatively impacted by 50 basis points due to delays caused by the storms.

Lennar said it saw a 4 percent increase in year-over-year direct construction costs in the fiscal third quarter ended August, driven by about 5 percent increase in labor cost and 3 percent in material costs.

For now the company’s overall gross margins are buoyant but bigger rival D.R. Horton Inc (DHI.N) has also drastically cut its 2017 forecast for cash flow from operations, citing delays related to the hurricanes.

Reporting by Arunima Banerjee and Ankit Ajmera in Bengaluru and Graphic by Ritvik Carvalho

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