James Hardie Industries (NYSE:JHX) is a manufacturer of outside building materials, including siding, trim, fiber cement and weather barriers.
JHX stock has already been under pressure over the last year, and its downward spiral has only sped up in recent days.
Shares of James Hardie have retreated more than 25% in late Q4, and the stock has lost about 40 percent of its value in the last 12 months.
Why are James Hardie shares plunging, and is the dip a time to buy JHX?
JHX’s Planned Acquisition of AZEK
By far the largest factor affecting the price of JHX shares today is James Hardie’s planned purchase of AZEK, a producer of outdoor building materials used in decks, railings, pergolas and other outdoor structures.
The offer James Hardie made for AZEK was quite generous, with a 37 percent premium over the last closing price before the announcement was made. Between cash and JHX stock, shareholders in AZEK are expected to receive about $57 per share.
The announcement of the AZEK purchase has sent JHX shares tumbling, an effect caused by investor concerns over the premium James Hardie is paying.
Right now AZEK trades at $48.85 and carries a P/E ratio of close to 50. That ratio will be even higher at the price JHX plans to pay for each AZEK share. As such, James Hardie will likely have to see substantial synergistic growth from the AZEK acquisition in order to make the price it’s paying make much sense.
The timing of the offer to buy is also somewhat concerning for current James Hardie shareholders. Tariffs, stubbornly high interest rates and the onset of weaker economic growth could all reduce spending on home projects and construction, putting pressure on both businesses. Rising costs could also squeeze the combined company’s margins.
To fully appreciate the decision to acquire AZEK, though, it’s necessary to look beyond the immediate economic climate. AZEK has been growing its sales faster than James Hardie for several years, a fact that very likely contributed to the decision to buy the company.
Furthermore, the combined company expects to create substantial new value by eliminating redundant staff and selling a larger range of products to US contractors. Demand for composite decking, which AZEK specializes in, is also expected to keep rising in coming years as more homeowners trade out traditional wood.
In the long run, the argument for James Hardie purchasing AZEK isn’t a bad one. The combined businesses could grow quite well together, and they have several natural synergies with one another. It may be difficult, however, for investors to get past the price James Hardie has agreed to pay for AZEK at a time when growth may be coming under macroeconomic pressure.
Is JHX Valuation Cheap?
Even with JHX depressed on worries of overpaying for AZEK, the shares don’t exactly look cheap. JHX currently trades for 23.6 times earnings, 2.6 times sales and 28.0 times operating cash flow. While these metrics aren’t exactly terrible, they don’t make JHX look especially inexpensive.
That said, it’s worth bearing in mind that James Hardie still has some fairly attractive qualities as a business. In the last 12 months, the company has delivered a 14.2 percent return on invested capital and a 22.3 percent return on equity.
Analysts also expect modest earnings per share growth of about 3 percent annually over the coming 3-5 years. If all goes well, the AZEK buy could add to this growth rate. Even so, investors seem to be paying rather a lot for an uncertain chance at better growth ahead.
Sales Slide Has Hurt JHX
Unfortunately, revenue growth at the company has already been coming under significant pressure in recent quarters.
Growth rates have been declining since the end of 2023, and James Hardie has actually experienced slightly negative revenue growth in the last two quarters.
Net incomes have also fallen off over the same period, and net margin has trended slowly but surely downward for the last couple of years.
The last reported quarter was slightly difficult for James Hardie, with a 3 percent decline in net sales and a 22 percent decline in EBIT. Adjusted diluted EPS fell 13 percent, and adjusted net income fell 15 percent. Management specifically acknowledged weakness in multi-family home construction as part of the reason for this downtrend.
Though nothing has gone disastrously wrong at James Hardie and such fluctuations are normal in building supply companies, it’s a bit worrying that the company has seen such a decline at a time when it appears to be seeking growth by paying very large acquisition premiums. This creates one more layer of risk for investors looking at JHX today.
Is JHX Stock a Buy Sell or Hold?
The premium JHX plans to pay for AZEK is likely a bit too large and comes at the wrong time for many investors suggesting a Sell or Hold is best.
In addition, JHX shares remain a bit pricey even after their fall at a time when the company could start experiencing macro headwinds.
All of these factors combined seem to make James Hardie less than attractive as a buy right now. The company may very well see decent forward growth once it fully integrates AZEK into its business, but that growth seems too uncertain and likely not quite brisk enough to justify the price JHX is going for today.
One thing to keep in the back of our minds is that the market appears to have already priced in the potential downside of overpaying for AZE so sellers now will realize all of the negative risks without the chance of a gain that may eventually come from the acquisition. So, while now doesn’t appear to be the time to buy JHX , it probably isn’t the best time to sell it either, so a Hold seems to split the difference.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
