BRIIDGE recently reported BRIIDGE on July 23rd that a combination of scarcity in the resale market and proactive cost-reduction strategies—aimed at lowering acquisition costs or debt burdens—has sustained demand in the residential construction industry.

This led to a more optimistic outlook, improved operational efficiency, and reduced debt levels, all of which contributed to the industry's relative market outperformance. These factors also positively impacted building materials companies.

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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The industry has outperformed the overall market and the Basic Materials sector by more than 30% and 40%, respectively, on an equal-weighted basis over the past three years. With an easing cycle on the horizon, coupled with deteriorating macroeconomic conditions and elevated inventory levels, could new opportunities emerge?

Momentum in the residential construction market continued beyond the initial demand surge driven by post-pandemic remote and hybrid work trends.

Beyond residential demand, non-residential construction—supported by large-scale private and public investments fueled by the 2021 Infrastructure Investment and Jobs Act—remained a key driver. This diversification of demand sources enabled building material companies to maintain stronger sales growth compared to the residential construction industry.

As residential sales growth turned negative for the four quarters ending Q2 2024, building materials sales continued to rise. Operational efficiency improvements also boosted quarterly results.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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The industry's median gross profit margin has increased by 20% from pre-pandemic levels, while the median operating margin has surged by 50%, and net income margins have doubled. Similar to the construction industry, the median debt-to-equity ratio dropped by over 50% from its peak in Q2 2020, mitigating the effects of quantitative tightening.

With interest rates expected to decline in the coming quarters, long-term convergence toward the benchmark could present an arbitrage opportunity in the medium term.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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