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Highlights
- James Hardie stock plunges to 21-month low.
- Investor concerns rise post-Azek acquisition.
- Mixed reactions from financial analysts.
James Hardie Industries (ASX:JHX), a prominent supplier of wall cladding and plasterboard, has seen its shares drop to their lowest level in 21 months following the announcement of its acquisition of Azek, a US-based industry peer. This acquisition, priced at approximately 23 times earnings, has led to a significant decline in investor confidence, with concerns that the purchase might have been overpriced. This event contrasts with the broader ASX mining sector, which has shown relative stability despite fluctuations in global commodity prices.
As of late afternoon trading, James Hardie's stock had fallen nearly 20% since the opening bell on Monday, hitting a new low of $37.78. This downturn is largely attributed to the dilution of the company’s return on capital, a result of using both shares and cash to fund the acquisition. Additionally, there are growing doubts about the anticipated $350 million in synergies expected from the merger, which have contributed to the negative sentiment among investors.
Following the initial drop, the shares continued to slide by another 5% on Tuesday. Despite this, analyst opinions vary. Morgan Stanley, taking a more optimistic stance, upgraded James Hardie to overweight, highlighting the company's solid fundamentals and what they consider an attractive future price-to-earnings ratio. They noted, "We expect a volatile trading period while the market digests the detail,” forecasting a decline to a price-to-earnings ratio of 12.7 by the 2028 financial year from a current 15.6, compared to the five-year average of 21.
On the other hand, Macquarie expressed a more cautious perspective, downgrading the stock to neutral. Their analysts are concerned about the potential dilution of James Hardie's historically strong returns, labeling the outcome as disappointing for shareholders. They pointed out that Azek had only returned about 13% on capital employed over the past year, significantly lower than James Hardie’s robust 55%.
The divergent views from analysts reflect the complexity and potential risk of the transaction, with the market likely to keep a close watch on James Hardie's performance and integration strategy moving forward. As the company navigates through this challenging period, investors are advised to stay informed on further developments.
