NCI Building Systems Faces Tough Times in Rough Sector

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NCI Building Systems Inc. (NYSE:NCS) is not exactly a household name, but it caught my attention after posting a wider-than-expected loss in its last quarter. The company is in a rough sector right now, as it manufactures and markets metal products for the nonresidential construction industry in North America, which has been under pressure since the Great Recession.

The company has several segments you should be aware of. The company’s Metal Coil Coating segment is engaged in cleaning, treating, and painting various flat rolled metal coil materials in coil form, as well as in slitting and/or embossing the metal before the metal is fabricated for use by various industrial users. It also cleans, treats, and coats hot-rolled and light gauge metal coils for third parties for various applications, such as construction products, heating and air conditioning systems, water heaters, lighting fixtures, ceiling grids, office furniture, appliances, and other products. This segment serves the manufacturers of metal components and engineered building systems, as well as steel mills, metal service centers, and painted coil distributors.

The company’s Metal Components segment manufactures metal components, including metal roof and wall systems, metal partitions, metal trims, doors, and other related accessories for new construction and in repair and retrofit applications for industrial, commercial, institutional, agricultural, and rural uses. It also sells interior and exterior walk doors for use in the self-storage industry, and metal and other buildings. This segment sells metal components directly to regional manufacturers, contractors, subcontractors, distributors, lumberyards, co-operative buying groups, and other customers.

The company’s Engineered Building Systems segment offers engineered structural members and panels, as well as self-storage building systems for commercial, industrial, agricultural, governmental, and community markets. This segment sells its products to builders, general contractors, developers, and end users through an in-house sales force and private label companies. As you can probably tell, without a lot of economic expansion, a company engaged in this type of work is facing immense pressure. This was reflected in the company’s most recent earnings, as it missed on the top and bottom lines. But should you sell the stock?

The loss was wider than expected, although sales and margins improved. For the fiscal second quarter, sales grew 4.2 percent to $305.8 million from $293.4 million in the prior year’s second quarter, reflecting sales growth in all three operating segments. Gross margin improved sequentially to 19.5 percent from 19.1 percent in the first quarter but was lower on a year-over-year basis due to the continued negative impact of severe weather, which drove 22 plant closure days in 2014 compared to two in the comparable period last year. The benefits of pricing improvements in the quarter were offset by weather-related inefficiencies in freight, material costs, manufacturing costs, and unfavorable product mix.

Expenses rose 3.7 percent to $65.1 million from $62.8 million in the second quarter of 2013. Corporate expenses declined 12.7 percent in the second quarter compared to the same period last year and decreased 6 percent in the first half of fiscal 2014. Overall, adjusted earnings were $6.3 million, down from $10.6 million in the prior year’s second quarter. But just how did each segment of the company perform?

The Metal Coil Coatings group’s third-party sales grew 16.5 percent year over year as coating and tolling sales increased for both the light gauge and heavy gauge product lines. Volume improvement was enhanced by favorable mix, but the gain was offset by elevated steel costs associated with supply chain disruptions and increased marketing expenditures. Higher utility expenses related to inclement weather and cold temperatures also contributed to lower earnings.

The Metal Components group saw a 5.1 percent increase in sales versus the prior year’s quarter driven by growth in the legacy single skin products. Pricing was favorable compared to last year’s second quarter, but operating income of $4.6 million declined 11.3 percent. The Engineered Buildings group’s sales increased 1.6 percent compared to last year’s second quarter. It also benefited from value pricing during the quarter and achieved improvement in sales margin and product mix but the gain was offset by weather induced lower volumes and increased freight expenses.

CEO Norman C. Chambers said: “Although our second quarter performance was impacted by extreme winter weather in February and March, including disruption to our various manufacturing plants, bookings and backlog began to rebound at the end of the quarter. April and May bookings were up 8 percent and 28 percent, respectively, and the 6 percent growth in our backlog positions us well for the second half. I am encouraged by the improvement in market demand and the success of our value pricing initiatives. Although our performance in the first half of fiscal 2014 was significantly impacted by severe winter weather, our bookings and backlog have continued to improve both sequentially and as compared to last year, both in volumes and in expected margins.”

Looking ahead, I do not have a lot of conviction that the economic climate will allow this company to drastically improve anytime soon. However, it does make most of its money in the second half. Considering the year-over-year decline in earnings, it is tempting to sell the stock at current levels. I think it would be prudent to hold the stock and allow a few more quarters of data to come in before releasing this name.

Disclosure: Christopher F. Davis holds no position in NCI Building Systems and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock and a $17 price target.

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