Green Shoots for Green Building: Seven Stocks to Play the Trend
Tom Konrad CFA
|Rockwool insulation (Photo: Achim Hering)|
Signs of Green Building Growth
Rockwool International (COP:ROCK-B,OTC:RKWBF) recently announced the establishment of the insulation manufacturer’s first US factory, in Mississippi, about 30 miles outside Memphis, Tennessee. The firm has been seeing double-digit annual sales growth in North America, driven by interest from do-it-yourself chains and insulating commercial buildings, and expects this growth to continue.
The company’s rock wool insulation, sustainably made from stone and recycled materials, can provide improved fire protection when compared to traditional insulation products.
Rockwool is far from the only green building company to predict growth in 2012, despite the generally depressed housing market. Geothermal (a.k.a. Ground-Source) Heat Pump (GHP) manufacturers Waterfurnace (TSX:WFI,OTC:WFIFF) and LSB Industries (NYSE:LXU) both said they see signs of revival in demand for their green building products during their first quarter conference calls. Insulated Concrete Form (ICF) and Structural Insulated Panel (SIP) manufacturer PFB Corporation (TSX:PFB, OTC:PFBOF) did not provide an updated outlook in the first quarter, but has seen continuous sales growth over the last several years, despite the downturn, and is expanding manufacturing in the US and has seen favorable pricing trends beginning to emerge.
With signs of growth just beginning to emerge, now seems a good time to get into green building stocks, before the trend is widely recognized. Here are seven to consider, starting with the most-well known large capitalization companies, and moving on to the hidden gems.
1. Honeywell (NYSE:HON)
Building climate control leader Honeywell has expected earnings for 2012 of $4.51, for a forward price/earnings (P/E) ratio of 12.4. Honeywell pays a quarterly $0.3725 dividend for an annual yield of 2.7%. Honeywell is not a focused play on green building, having large aerospace, materials, and transportation segments. About a third of the company’s sales come from its building automation and control segment.
2. Johnson Controls (NYSE:JCI)
Building efficiency and autoparts leader Johnson Controls has expected 2012 earnings of $2.72, for a forward P/E ratio of 10.4 at the current price of $28.23. The company pays a $0.18 quarterly dividend, for an annual yield of 2.6%. A little over a third of the company’s revenues come from its building efficiency segment.
3. Owens Corning (NYSE:OC)
Insulation maker Owens Corning has expected 2012 earnings of $2.08, for a forward P/E ratio of 13 at $27.13. Although expected earnings are down slightly from 2011, strong growth is expected to resume in 2013. The company does not pay a dividend. Although somewhat expensive compared to Honeywell and Johnson Controls, Owens Corning’s focus on the housing market means that revenues have been hurt more by the housing downturn and will benefit more from a recovery.
4. Rockwool International (COP:ROCK-B,OTC:RKWBF)
International insulation manufacturer Rockwool pays a 2% ($1.70) annual dividend, and is expected to earn $5.95 a share in 2012, for forward P/E ratio of 14. Earnings are expected to be up 7% in 2012 over 2011, on slightly falling revenues because of uncertainty in Europe. Rockwool is the most difficult company in the list for a North American investor to buy, since it generally must be purchased through a broker’s international trading desk. As such, this company is only appropriate for a long term investor making a fairly substantial investment. Like Owens Corning, Rockwool is a large cap, nearly pure-play green building company, and the difficulty of buying it is offset somewhat by the advantages of a regular dividend.
5. LSB Industries (NYSE:LXU)
Chemical and GHP manufacturer LSB is currently trading at a depressed price because of investor worries about damage from an explosion at one of its chemical facilities last month. This investor reaction seems out of proportion to the relatively small size of the potential uninsured losses from the incident. At $26.38 LSB has a forward price earnings ratio of 9 but does not pay a dividend. About a third of LSB’s revenues come from its climate control business.
6. WaterFurnace Renewable Energy (TSX:WFI, OTC:WFIFF)
Waterfurnace is a leading North American manufacturer of GHPs, and managed the housing downturn well by refocusing its business away from the weak residential market and towards the more resilient commercial market. The company pays a regular $0.24 quarterly dividend for a 5.93% annual yield at the current stock price of $16.03. Trailing twelve month earnings are $1.20 per share, for a trailing P/E of 13.4. Forward earnings estimates are not available for this little-followed company. Among the pure-play green building companies in this list, Waterfurnace is currently one of the two most attractively priced, and unlike PFB (below) is easy to buy for a US-based investor.
7. PFB Corporation (TSX:PFB, OTC:PFBOF)
PFB makes green building products from expanded polystyrene, such as the SIPs and ICFs mentioned above. The company pays a regular quarterly dividend of 6 cents a share for a 3.8% annual yield at $6.31 and has shown consistent earnings and revenue growth. PFB’s trailing twelve month earnings were $0.54 a share, for a trailing P/E of 11.7. Unfortunately, the stock is extremely illiquid, and so is only appropriate for very long term investors or smaller investors trading using limit orders.
Taxes on Foreign Dividends
Dividends from Rockwool, Waterfurnace, and PFB are subject to foreign withholding taxes, and so these stocks should be held in taxable brokerage accounts, where this tax can often be recovered through the federal foreign tax credit.
Disclosure: Long WFIFF, LXU, RKWBF, PFBOF
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