Transfer of Coverage; James Hardie's Fair Value Estimate Rises to AUD 51 From AUD 45.50

Equity Analyst

Esther Holloway

James Hardie's growth strategy includes marketing directly to homeowners, market share growth, and category expansion. We view this as rational and achievable, given past success. We estimate Hardie has about 90% market share in the fiber cement category in its main geography of North America, which contributes about 80% of group operating income. About two-thirds of North American EBIT is from repair and renovation, or R&R, and the remainder is from new house construction. We view the R&R market as less cyclical, with homes needing to be resided approximately every 40 years. According to the U.S. Census Bureau, about half of all houses are 40 years or older. As such, we expect a steady pipeline of homes requiring siding replacement or repairs through the next decade.

A focus on marketing directly to homeowners sees James Hardie promote demand for its fiber cement-based products emphasizing product value, durability, and design. The strategy to increase penetration and grow market share involves taking share from competing siding products seen as less durable or higher maintenance. Indeed, over the five years to 2022, The U.S. Census Bureau reports fiber cement siding on newly built houses gained 3 percentage points, or pp, market share in the U.S., compared with vinyl (down 2pp), stucco (up 2pp), brick (down 2pp), and wood (down 1pp). Fiber cement siding was the siding of choice in 23% of all new U.S. house completions in 2022. We estimate James Hardie fiber cement siding is on about 7% of existing U.S. houses. 

Another growth initiative is targeted architectural products to appeal to higher end markets, penetrate regions with different housing styles, and compete with costlier siding materials such as stucco and brick. This involves leveraging research and development into new products to better fit markets and/or improve margins. The firm’s primary R&R market is the U.S. Northeast and Midwest where the climate and house framing style suits traditional overlap siding, but newer products are targeted at other regions, such as a stucco-look product which competes in the predominantly stucco-clad Southwest.

Business Strategy & Outlook

We allocate James Hardie a wide moat rating primarily owing to Hardie’s intangible assets. We assign cost advantage as a secondary moat source. Hardie’s brand presence and reputation provide the business with pricing power and the ability to maintainably earn well above its cost of capital. Hardie pioneered the development of fiber-cement technology in the 1980s and has maintained its dominance in the exterior fiber cement siding category over a multi-decade period in the U.S. and Australia/New Zealand. James Hardie has about 90% of market share in the fiber cement category in the U.S.—where it earns 80% of group EBIT. We forecast return on invested capital including goodwill averaging about 23% over the 10 years to 2033, well above our weighted average cost of capital estimate of 8%. 

Hardie’s North America operations have profitably disrupted the exterior siding market for decades. Since the mid 2000’s, Hardie has grown its share of the North American siding market in new single-home construction and grown EBIT margins to approximately 23% and 28%, respectively, from around 9% and 20%. Hardie claims its siding is on about 10 million U.S. homes, or about 7% of the total housing market. About half of all U.S. houses are over 40 years old, indicating the size of the addressable market for residing and substantial R&R opportunities for James Hardie. 

Hardie’s brand is synonymous with high quality fiber cement siding products. The firm is the driving force of research and development and product innovation within the fiber cement and siding industries. We surmise that Hardie’s history of establishing the category and continual release of innovative product ranges has cemented its status as the industry leader in the eyes of consumers. This is evidenced by its ability to continue to take market share at the expense of alternative siding materials. Over the five years to 2022, The U.S. Census Bureau reports among new single-family houses completed, fiber cement siding gained 3% market share compared with vinyl (down 2%), stucco (up 2%), brick (down 2%), and wood (down 1%). Fiber cement siding is the third most common siding material on new houses at 23% of total new houses, compared with stucco at 27% and vinyl a close second at 24%. 

Products within the exterior siding segment are installed on the outside of buildings and are typically marketed directly to homeowners. As a result, product quality, maintenance and lifetime costs, and aesthetic considerations drive consumer purchasing decisions making demand significantly more price inelastic. This is particularly evidenced by Hardie’s market share gains at the expense of vinyl siding over preceding decades despite the much higher costs for installation and initial outlay. Further, builders are reluctant to risk their reputation for a lesser-known brand or new-entrant that hasn’t established a quality reputation as James Hardie’s products have over about 30 years. Indeed, Hardie’s largest competitor, Allura, settled a class action for USD 12.5 million in 2021 associated with product defects. 

By volume Hardie’s largest competitors are vinyl and stucco. Over the past decade vinyl has been losing market share at a rate of about one percentage point per year in the new construction category. Conversely, both fiber cement and stucco have gained about one percentage point market share per year over the past decade. Hardie’s has introduced a new stucco-style product to compete with stucco. 

In the fiber cement category, pricing for Hardie’s siding range is similar to competitors Allura and Nichiha, but the value add is much more, such as dedicated Hardie trained installers and a wider color range. Hardie’s architectural range, which features alternatives to stucco and rendered walls, charges a pricing premium although management states costs are akin to the regular range, leading to higher profit margins for the product. 

In the siding category the initial outlay for Hardie panels sit at the mid to upper end of prices, surpassed only by stone and wood-look siding. Stucco is priced similarly, while brick, wood, and vinyl are all cheaper siding materials. Nonetheless, Hardie has been gaining market share over the past decade. We believe this is because fiber cement is low maintenance and long lasting with minimal additional costs for repairs and maintenance after the initial outlay. 

Fiber cement siding typically lasts about 50 years. There is virtually no maintenance aside from painting every 15 years, versus every five years for some other siding materials such as wood. The firm offers a 15-year warranty to cover this claim. Vinyl can require regular maintenance and repairs as the material can easily damage, albeit this is usually inexpensive and can be done by a homeowner. Stucco on a wooden frame/backerboard wall lasts about 50 years too—longer if installed on a concrete block wall. Maintenance is also minimal, but finding good-quality tradespeople to install or repair stucco can be time-consuming and costly in some regions due to a shortage of skilled labor. Other siding materials typically last about 20 to 40 years. 

The reliability of product warranties is also an important consideration for customers. Hardie’s relative scale advantage and position as the industry leader provides confidence to consumers that they will be able to meet any product warranty obligations over the 30-year product warranty and 15-year paint warranty that it offers on its exterior siding products.

We also think Hardie has a secondary moat source of a scale-based cost advantage relative to competing fiber cement exterior fiber competitors. We think James Hardie can use its patents, and scale-based advantages in research, sales and marketing, and manufacturing plants to keep ahead of the much smaller competition. Hardie’s investments in research and development have averaged 2% of sales over the prior decade. In addition, we also suspect Hardie benefits from the manufacturing know-how associated with being the largest global manufacturer of fiber cement building products. 

While sales and marketing expenses are not separately disclosed, we suspect these are likely to be considerable, with marketing and advertising products directly to homeowners a pivotal piece of Hardie’s medium-term strategy. Hardie manages sales teams, customer service support, and telemarketing operations. 

In North America, the firm has 12 manufacturing plants, with planned future capacity expansion expected to add 25% more capacity to existing plants. Hardie’s plants are strategically located close to its distribution center customers and provide easy access to raw materials thereby reducing transportation costs. Fiber cement peers do not have anywhere near this scale. Nichiha has just one U.S. manufacturing facility and Allura has three. 

Hardie’s derives about 10% of group EBIT from the North American fiber cement interior product range. Better known as "HardieBacker," it has approximately 95% category share within the rigid underlayment market. Channel checks with big-box retailers suggest Hardie earns a premium of between 20% and 50% for HardieBacker relative to substitute products despite being a largely commoditized product which is hidden from view when installed.

Wide

Economic Moat

James Hardie Industries

James Hardie Industries Plc engages in the manufacture of fiber cement siding and backer board. It operates through the following segments: North America Fiber Cement, Asia Pacific Fiber Cement, Europe Building Products, and Research & Development. The North America Fiber Cement segment manufactures fiber cement interior linings, exterior siding products and related accessories in the United States. The Asia Pacific Fiber Cement segment includes all fiber cement products manufactured in Australia and the Philippines, and sold in Australia, New Zealand, Asia, the Middle East and Pacific Islands. The Europe Building Products segment includes the Fermacell business and fiber cement product manufactured in the United States that is sold in Europe. The Research and Development segment represents the cost incurred by the research and development centers. The company was founded in 1888 and is headquartered in Dublin, Ireland.

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James Hardie Industries Plc engages in the manufacture of fiber cement siding and backer board. It operates through the following segments: North America Fiber Cement, Asia Pacific Fiber Cement, Europe Building Products, and Research & Development. The North America Fiber Cement segment manufactures fiber cement interior linings, exterior siding products and related accessories in the United States. The Asia Pacific Fiber Cement segment includes all fiber cement products manufactured in Australia and the Philippines, and sold in Australia, New Zealand, Asia, the Middle East and Pacific Islands. The Europe Building Products segment encompasses the Fermacell business and fiber cement product manufactured in the United States that is sold in Europe. The Research and Development segment represents the cost incurred by the research and development centers. The company was founded in 1888 and is headquartered in Dublin, Ireland.

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SYDNEY & CHICAGO--(BUSINESS WIRE)--James Hardie Industries plc (ASX: JHX; NYSE: JHX), today announced results for its third quarter ending 31 December 2023. Third Quarter Fiscal Year 2024 Highlights, Compared to Third Quarter Fiscal Year 2023, as applicable: Global Net Sales of US$978.3 Million Global Adjusted EBITDA of US$280.4 Million, with an Adjusted EBITDA margin of 28.7% Global Adjusted EBIT of US$234.1 Million, with an Adjusted EBIT margin of 23.9% Record Adjusted Net Income of US$179.9.

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James Hardie Industries plc (JHX) Q2 2024 Earnings Call Transcript

CHICAGO & SYDNEY--(BUSINESS WIRE)--James Hardie Industries plc (ASX: JHX; NYSE: JHX), today announced results for its second quarter ending 30 September 2023. Second Quarter Fiscal Year 2024 Highlights, Compared to Second Quarter Fiscal Year 2023, as applicable: Global Net Sales of US$998.8 Million Record Global Adjusted EBITDA of US$285.5 Million, with an Adjusted EBITDA margin of 28.6% Record Global Adjusted EBIT of US$240.0 Million, with an Adjusted EBIT margin of 24.0% Record Adjusted Net I.

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SYDNEY & CHICAGO--(BUSINESS WIRE)--James Hardie Industries plc (ASX: JHX; NYSE: JHX) will announce financial results, for its second quarter ended 30 September 2023, on the ASX before market on Wednesday, 8 November 2023. The Company will host a conference call that morning at 9:00am Australian Eastern Time (AET). For those in North America the conference call will commence at 5:00pm Eastern Time (ET), Tuesday 7 November. Teleconference Registration: https://s1.c-conf.com/diamondpass/10033260-b.

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