James Hardie Industries
Cementing leadership
Siding is a big business, particularly in the US and other regions with similar construction styles such as Australia and, to a lesser degree, Europe. In 2023, the US siding market was valued at approximately $26bn (commercial and residential) and is broadly divided into four main categories, each offering distinct advantages and disadvantages.
Here’s a handy guide from Lowe’s:
While vinyl has traditionally been the most popular choice in the US because of its affordability and low maintenance, it’s been losing market share to engineered (composite) wood and fiber cement options, which offer higher durability and a more premium aesthetic.
James Hardie is the leading manufacturer of fiber cement siding, trim and accessories for both the new construction and repair and remodel (R&R) residential housing markets.
Though fiber cement as a general category currently accounts for only 9% of the repair and remodel (R&R) market, it commands a 25% share in new construction, indicating significant potential for long-term growth. As homes built with fiber cement siding age, the material is likely to see increased demand in R&R.
You can see the opposite happening with vinyl, which is steadily losing market share as home owners opt for a more modern look. In fact, capturing share from vinyl, particularly in the R&R market, has been James Hardie’s biggest opportunity.
They refer to this core strategy as 35/90—a plan to increase the fiber cement share of the wood-look siding market (vinyl, wood products, fiber cement) from the 22% that it is currently to 35%, while holding on to their 90% market share in the category, across both new construction and R&R. They give no timeline for achieving this, however.
[NB: these market share figures are a little different from the ones given above since those take into account the whole market, including masonry and stucco, whereas the “35/90” figures only look at immediate competitors, which exclude masonry and stucco]
i. Profitability
James Hardie is essentially synonymous with the category of fiber cement, having pioneered the development of the technology for the construction industry since the 1970s. It does face some competition from smaller brands in this segment (Allura, CertainTeed, Nichiha), and also from large companies in the composite wood segment (LP Corp).
Due to the availability of these alternatives, JH focuses on keeping prices competitive (defending or increasing its market share) while maintaining higher margins through cost efficiencies from increased volume. The company is comfortable with letting margins fall if it believes this will lead to share gain.
Here’s Matthew Marsh, former CFO, on a 2018 earnings call:
Our pricing decision is done really outside of any context on what input costs are doing. What we're trying to do is gain market share. We're trying to balance that. We're getting value for our product in the market. So when we do, do the annual strategic price increase, it's always against the backdrop of where are we at versus the alternative in the market… We're not considering or there's no discussions that we're having that would reconsider that given kind of the inflationary environment. The benefit and the strategic value of gaining market share far outweighs kind of the momentary point that we seem to be in a cycle.
Moreover, the current CFO, Rachel Wilson, repeatedly attributes margin variations to volume fluctuations (“Volume is our largest factor for revenue and margin”), through fixed cost deleveraging.
This seems to me like the correct strategy to pursue. Keeping your competitors from gaining volume is the best way to keep a dominant position in this market, since they won’t be able to survive for long on thin margins. This is evident in the fragmentation of the fiber cement market beyond JH, filled with smaller companies which seem to come and go every few years.
All that being said, JH still commands high and fairly stable margins through brand awareness (which gives them the volume) and cost control. Their main variable input costs are pulp, cement, freight, and labor.
In terms of fixed costs, they have 10 manufacturing sites across the US (and even more in Europe, Australia, and Philippines) which enables them to be physically closer to their customers and deliver product with minimal lag—an important selling point in the construction industry and a differentiator from their smaller fiber cement competitors.
ii. Marketing
In the past, James Hardie's primary market was in new construction, where the company collaborated closely with builders and contractors. However, over the past decade it has also found considerable traction in R&R by targeting homeowners more directly. About 65% of its their volume now comes from the R&R market.
With around 40 million homes in North America over 40 years old—a common age for renovations—JH views the R&R market as its most substantial opportunity for future growth. Meanwhile, homeowner wealth and equity remains at an all-time high, providing future financial capacity for R&R projects.
Accordingly, for the past few quarters management has been ramping up marketing spend. Here’s a graph of the company’s SG&A margins by quarter:
And here’s a collaboration they did with a popular influencer and designer from HGTV, highlighting the company’s ColorPlus products, which is a portfolio of premium pre-painted siding. It is differentiated from James Hardie's traditional 'primed' fiber cement products that require painting on-site.
In my opinion, the campaign is really good! I like the “no surprises” messaging.
I’ve watched a lot of siding reviews in the past few weeks and one video in particular made a lasting impression on me. In it, a homeowner explains her clear preference for choosing James Hardie siding, in a very decisive way.
While the video might have been sponsored (I can’t remember and unfortunately I can no longer find it in my browser history), it nevertheless allowed me to understand the product’s aspirational appeal. Siding is literally the most visible part of your house.
Long-term, there are other strong factors at play that support the brand’s influence and sustainability:
First, since the material still remains relatively unfamiliar to many consumers, reputation carries more weight than usual. The term itself, ‘fiber cement,’ evokes complexity and innovation in the way that ‘composite wood,’ for example, does not.
Second, re-siding involves a substantial initial investment that is meant to last for decades; therefore, customers need assurance that they can source replacement planks from the same manufacturer in the future.
iii. Valuation
If we had to distill our investment philosophy into a simple motto it would be to look for great stories about great companies at great prices. But, invariably, not all of those three attributes will line up at the same time.
I believe there’s a great story here about pent-up housing demand that will be unleashed once mortgage rates come down.
I believe James Hardie is a great company with a great product, poised to capture that demand, especially in the R&R market.
I don’t believe the company is currently valued at a great price—maybe good, or fair. But not great.
And that’s ok by me. We will limit ourselves to a small position until there’s a more opportune time.
James Hardie is currently trading at 26x P/E, which is in the mid-range of its 10-year history, and 20x Fwd P/E. I think this not unreasonable for a company that has been growing sales at 6% CAGR since 2006 (picking a conservative start date; the figure is closer to 8% if we start a few years before that) with an average ROC of 18% in the last 5 years. Avg EPS growth has been 20% in the last 5 years.
I believe the company has a lot of room to grow from here. But I’ll wait until I finish my DCF model before I buy. More soon…
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