Industry checks indicate that demand for building products was “exceptionally strong” in the first quarter of 2022 and will continue to be strong through the second quarter due to “lean channel inventory and robust contractor backlogs,” according to BofA Securities.
The Building Products Analyst: Rafe Jadrosich downgraded the rating for Fortune Brands Home & Security Inc FBHS from Buy to Underperform, while reducing the price target from $118 to $74. In the same note, the analyst also downgraded the rating for Masco Corp MAS from Buy to Neutral, while lowering the price target from $75 to $55.
The Fortune Brands Home & Security Thesis: “We see risk to consensus estimates in 2H22, which imply a material sequential margin improvement,” Jadrosich said in the downgrade note.
The analyst mentioned 3 reasons for the Underperform rating:
- Gross margin headwinds into the second quarter
- Potential trade-down to lower-cost products or brands
- “Guidance already contemplates a slowdown in China (6-7% of revenue), but the recent surge in COVID-19 cases (particularly in Shanghai) could cause an extended pause in residential remodeling... ”
The Masco Thesis: “In addition to plumbing cost pressure, raw material costs continue to rise in architectural coatings (TiO2, tin),” Jadrosich said in the note.
“Masco’s BEHR paint brand has reported healthy growth over the two quarters, but do-it-yourself (65% of paint sales) still faces very tough comparisons and improving supply chain at key competitors (especially Sherwin) could reverse some of BEHR’s share gains,” he added.
The analyst further mentioned that Masco’s prospects could be impacted by a weaker macro environment in Europe, a region that contributes around 20% of the company’s operating profit.
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