James Hardie Industries plc (ASX: JHX) shares have fallen 8% to around $38.35 on Friday following the release of its latest results.
Investors clearly have seen something they didn't like. But has the sell-off created an opportunity to buy?
What's behind the weakness?
On the face of it, James Hardie shareholders had plenty to celebrate. Second-quarter revenue from continuing operations rose 24%, while adjusted EBITDA jumped 44%.
So why are investors selling? I suspect the concern is more about what the next few months could bring. The US housing market is still struggling, with management reporting weak new home construction across many of its markets.
That's a difficult environment for a company whose products are widely used in building and improving homes. And while management stuck with its full-year guidance, it expects adjusted EBITDA to be lower in the third quarter and second half.
Seasonal weakness in decking, higher freight costs, and softer housing conditions are all expected to weigh on performance.
I can see why investors are cautious. But I think there's a good case for looking beyond the next couple of quarters.
Why I'd buy James Hardie shares
The biggest reason I'm positive on James Hardie shares is that I believe it can grow even when the wider housing market isn't doing it any favours.
Its fibre cement siding competes with materials such as wood and vinyl, and there's plenty of scope for more builders and homeowners to make the switch.
We saw that opportunity playing out in the latest quarter. Siding and Trim sales increased 15%, helped by higher fibre cement volumes and market share gains.
I think that is encouraging. James Hardie is winning customers despite weak construction activity, which I believe puts it in a strong position to benefit when the housing market eventually recovers.
I also think the AZEK acquisition could prove valuable over time. It has brought decking and railing products into the business, giving James Hardie more to offer builders and homeowners through its existing distribution relationships.
The integration is making progress, too, with cost savings running ahead of schedule.
I believe the expanded product range and potential savings could help James Hardie become a considerably more profitable business over the coming years.
Attractive valuation
Another reason I am positive is the valuation of James Hardie shares.
At $38.35, the shares trade on a price-to-earnings (PE) ratio of around 20 times forward earnings, according to CommSec consensus estimates.
For a business with a strong competitive position and room to grow, I think that offers a good risk-reward.
Foolish takeaway
I don't know how long the US housing slowdown will last, and I wouldn't rule out further share price volatility.
But I'm encouraged by James Hardie's ability to gain market share while demand is weak.
I think its growth opportunities extend well beyond this difficult period, and I'd be happy to buy at today's price and hold for the long term.
The post James Hardie shares sink 8%. Would I buy them now? appeared first on The Motley Fool Australia.
Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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