Credit Suisse analyst Ivy Zelman and her research team are out with a report this week that says the building products sector is stable, perhaps a bit improved from March, but it questions whether companies will be able to sustain this pace.
The report, based on a survey of building products companies, said, "Demand for our building product survey respondents was predominantly flat in April versus March, with ~70% of respondents relaying flat sequential trends, higher than the first quarter, when 60% of respondents reported similar results. However, there were no respondents reporting weaker trends, which is a turnaround from last quarter when 16% of respondents cited deterioration."
That was the good news. The report continued, "We anticipate that the incremental leg down that we are now witnessing in new residential construction will provide additional headwinds to the building products group in general, particularly those that are more tied to this channel."And it added, "Pricing remains under significant pressure, with 56% citing lower prices in April and 44% reporting flat trends. The combination of higher costs with increased pricing pressure has obvious negative implications for profitability."
One supplier, whom the report does not identify, expressed concern that some large builders may be starting to sacrifice quality in the quest to cut costs. The report said that for this "major building products distributor, sales are down significantly from the prior year, and this contact indicated that it is receiving a lot of pricing pressure from builder customers, which seems to have increased in April. Most are asking from 5-20% off. This contact will not provide concessions unless it gets something in return (i.e. greater exclusivity, more products, etc.). If it does, it will typically give 5%-10% concessions. This contact is really concerned with how many corners the publics are cutting right now to cut costs. It thinks quality is really being sacrificed and it is only a matter of time before it blows up in their faces."
The building products sector has been buoyed by continued strength in the repair/remodel and the commercial segments, which have partially offset the downturn in sales to new home builders. But there are increasing signs that consumer spending may be slowing, based on preliminary reports from retailers and on consumer confidence surveys, which could knock the underpinnings from the home improvement category.
Among the report's key conclusions were:-- "Repair/remodel continues to exhibit stability, with home centers benefiting from better traffic/weather. However, large ticket remodel projects remain under pressure and promotional activity helped spur some of the strength. -- Commercial related activity was solid according to respondents.-- Most respondents relayed flattish raw material trends following the spike in March, though there is variation depending on the material.-- Pricing remains under pressure, with builder customers still aggressive and persistent."
Regarding raw materials, Credit Suisse noted "significant" cost increases in copper and stainless steel during the past several months.