NCS/business construction on the mend

NCI Building Systems (NCS): NYSE: US$9.86 | US$182.4M | Buy, Target US$17.50


Investment recommendation
Stronger-than-expected fiscal second quarter (Apr.) results and a positive outlook from management help reinforce our thesis that the nonresidential construction industry, while still facing economic headwinds, is on the mend. We reiterate our BUY/Best Idea rating and $17.50 price target.


Investment highlights
Total FQ2 (Apr.) sales were $225.6M (+19% q/q, +11% y/y), solidly exceeding our estimate of $210M. While NCI produced sales upside in each of its three business segments, by far the biggest improvement was seen in engineered building systems (EBS), which reported sales of $129.8M (+28% q/q and +14%
y/y) vs. our estimate of $110M.

Adjusted EBITDA of $7.7M was well above our estimate of $700k, driven by stronger sales and significantly higher-than-expected gross margins of 22.5% vs. our 19.5% estimate. Management noted that gross margins benefited in particular from faster turns business, which is consistent with our research that indicated that customers were increasingly placing orders for firm project start dates. We also note that EBS operating income was near break-even levels in FQ2 – much better than our estimate of $(2.2M).

NCI reported sequential bookings growth of 16% and stated that an “increasingly greater proportion of our backlog and bookings [was] represented by commercial/industrial work.” Reported backlog at the end of
FQ2 was $210M, up from $205M in FQ1/11. This higher proportion of C&I bookings/backlog is an important data point, in our view, as it is strongly suggestive of a recovery in the nonresidential construction market. Management estimated that C&I business was now back to near 70% of its business, which we view as a positive sign for growth going forward. Reported EPS were $(0.53) vs. our estimate of $(0.83). In our opinion, earnings per share are neither particularly relevant nor a good indicator of operating performance given the amount of “noise” below the operating income line on a quarterly basis.

Today’s summary briefs from Canaccord Genuity

· Cabot Oil & Gas (COG : NYSE): Most productive gas asset in North America; raising target to $85, upgrading to BUY

· NCI Building Systems (NCS : NYSE): Recent sell-off unwarranted; reiterate BUY/Best Idea, $17.50 target

· EnerNOC (ENOC : NASDAQ): Analyst day initial thoughts; maintain BUY, $28 target

· Onyx Pharmaceuticals (ONXX : NASDAQ): Tempered Nexavar outlook in breast cancer; maintain BUY, lowering target to $48

· Edwards Lifesciences (EW : NYSE): TVT takeaways and other TAVI musings; stay on sidelines -- HOLD, $90 target

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.

For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx

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