The Zhitong Finance App learned that RBC Capital Markets became cautious about the construction products sector before the third quarter earnings season, downgraded profit forecasts and downgraded the ratings of many individual stocks. Due to high interest rates, inflation, and weak housing demand, it is likely to continue until 2027.
Chief analyst Mike Dahl said that as expectations for housing recovery continue to cool down, RBC has actually removed endogenous sales growth from its model. The bank currently predicts that the number of single-family housing starts in the US will drop by about 5% in 2026 and drop by another 1% in 2027; maintenance and renovation spending will only increase by 1% this year, and is expected to remain basically the same next year.
The above revisions are significant for investors, as Wall Street expectations may still assume that the housing market rebound is stronger than what RBC believes is likely. The bank lowered the 2027 average earnings per share forecast for construction products manufacturers by about 10% and the EBITDA forecast by 7%. RBC believes that manufacturers are particularly vulnerable to rising raw material costs and limited pricing power, and are generally more optimistic about distributors in the current inflationary environment.
RBC downgraded the Builders FirstSource (BLDR.US) rating from “outperforming the market” to “equal the market”, and the target price was drastically lowered from $88 to $62. The bank expects its EBITDA of US$1.06 billion in 2027, down 16% from the previous forecast and lower than the agreed market estimate of US$1.21 billion. RBC mentioned deteriorating housing starts, intense competition, and pressure on gross margins. Higher leverage may also limit share buybacks and other capital allocations.
Owens Corning (OC.US) was also downgraded from “outperforming the market” to “equal the market”, and the target price was lowered from $172 to $127. RBC believes the third quarter of the roofing business may be better than feared, but weakening demand, distributors' inventory removal, and rising oil and asphalt costs will drag down the fourth quarter and 2027. Its 2027 EPS forecast was lowered from $12.20 to $10.16, and the market agreed that it was $11.81.
The bank was more bearish on Mohawk Industries (MHK.US), downgraded the flooring manufacturer's rating from “equal to the market” to “outperforming the market”, and lowered the target price from $130 to $112. RBC anticipates that weak demand for flooring will collide with rising oil, diesel and gas costs. Its fourth-quarter EPS forecast was $1.42, far below the market's consensus forecast of $1.69; the 2027 forecast was $8.97, while Wall Street's forecast was $10.06.
RBC is most pessimistic about Whirlpool (WHR.US), maintaining a “outperforming market” rating and lowering the target price from $32 to $22. Its 2027 EPS forecast is only $1.15, while the market's consensus forecast is $3.53. The bank mentioned weak demand for home appliances, competitive pricing, potential Canadian tariff costs, and a possible rise in steel costs after contract repricing.
There are still preferred targets. Ferguson Enterprises (FERG.US) is RBC's most popular multi-target company. The rating is “outperforming the market”. The target price is $286, reflecting the strong performance of large-scale projects and the HVAC business. RBC also maintained “outperforming the market” ratings for Fortune Brands Innovations (FBIN.US), Core & Main (CNM.US), SiteOne Landscape Supply (SITE.US), and QXO (QXO.US), but warned that QXO may face recent roofing business and macroeconomic headwinds.
The broader message conveyed by the Dahl report is that the 2027 recovery expected by the industry is being further delayed. According to RBC's revised construction forecast, the number of single-family housing units to be started in 2027 is about 890,000 units, lower than the previously assumed 5% increase; maintenance and renovation expenses are currently expected to remain basically the same, rather than the 3.1% increase previously anticipated. For investors, as the sector waits for housing demand to recover, companies' unique pricing power, exposure to stronger non-residential markets, and ability to protect profit margins are becoming increasingly important.