Why this building materials company will retain its top position

Outside of the reporting seasons in August and February, the Auscap Asset Management  investment team spend much of the year on the road visiting the operations of current and potential investments both within Australia and abroad. The last few months have been no different, with the team undertaking multiple trips across North America, the United Kingdom and around Australia. This is the first of 4 wires where we cover a few highlights from these recent trips.

James Hardie (JHX) – United States Operations & Distribution

James Hardie is the largest global manufacturer of fibre cement, with primary geographic end markets across North America, Europe, Australia & New Zealand. Fibre cement is a composite building and construction material, used mainly in facade and roofing products because of its strength and durability.

James Hardie distribution showroom promotional material, Jersey, USA. Source: Auscap 

James Hardie estimates it has a 90% share of fibre cement in its key market of the United States of America (US). The product has consistently been taking share as a housing cladding substrate from other alternatives such as vinyl, brick and wood. Fibre cement is cost competitive with vinyl, whilst having superior aesthetics as well as better fire, pest and weather resistance qualities.

Source: James Hardie

In June 2024, we attended the James Hardie Investor Day across Washington and New York, where we met with James Hardie management, distributors and customers. The James Hardie fibre cement product created an attractive exterior for the many homes we saw the various fibre cement products applied to.

James Hardie fibre cement clad homes, Washington DC, USA. Source: Auscap

The contrast to vinyl product was noticeable. The vinyl offering was relatively flimsy, demonstrated by the compression that would occur when a small amount of pressure was applied, as shown in the photos below. Further, vinyl is highly combustible, not resistant to extreme weather events such as hailstorms, not pest resistant and has a less desirable external appearance. It is not difficult to see why James Hardie is the predominant hard siding of choice for 24 of the largest 25 builders in the US.

Competing Vinyl exteriors with pressure applied, which fibre cement has been displacing. Source: Auscap

James Hardie’s strong market position and structural growth have driven a long history of solid earnings growth at very high returns on capital, albeit with some cyclicality, largely driven by James Hardie’s exposure to housing construction cycles. This track record of earnings growth over time can be seen in the chart below.

We came away from the Investor Day confident in the continued market share opportunities for the company and impressed by James Hardie’s management depth and research and development capabilities. Management reiterated their commitment to achieving long-term revenue growth and margin expansion at high returns on capital.

Managed Fund

Auscap Long Short Australian Equities Fund

Australian Shares

View

Find more insights from Auscap Asset Management here.