Credit Suisse On Building Products Stocks: Fortune Brands, USG Downgraded

• While Fortune Brands Home & Security Inc FBHS shares have lost 14 percent since January 4, shares of USG Corporation USG have plummeted 30 percent.
• Credit Suisse’s Michael Dahl downgraded the rating for Fortune Brands from Outperform to Neutral and for USG from Neutral to Underperform.
• The analyst expects the building product stock multiples to flatten and then contract.

The building products industry multiples are likely to remain flat following the recent decline, analyst Michael Dahl said. He pointed out that in the previous cycle, these multiples had begun to contract “even before growth forecasts peaked” and they bottomed “concurrent with peak earnings.”

Fundamental forecasts support multiples in-line with the historical averages, given that growth in housing continues and the segment’s solid relative growth profile. Dahl added, however, that there was “heightened risks surrounding growth,” while noting that “our CS Econ team recently lowered their ’16 U.S. GDP growth est. while highlighting downside risk from global contagion.”

While the industry should witness robust growth in 4Q15 and 1H16, the cautious stance of investors could restrict the rally, the analyst commented.

Fortune Brands

The price target for Fortune Brands has been reduced from $53 to $50. Dahl mentioned that solid execution and balance sheet optionality are supportive, but is already reflected in the company’s valuation.

Re-leveraging may now be less rewarded and consensus does not seem to be capturing the increasing growth headwinds [Canada/China], the analyst stated.

USG

The price target has been reduced from $26 to $17. Dahl wrote, “…risk to consensus remains based on a likely lack of traction on wallboard pricing and demand growth rebounding more slowly, coupled with increased competition in ceilings.”