James Hardie: high value versus high earnings

Over the past three months, companies that have historically high P/Es have come crashing back to earth on earnings disappointments. 

Examples include ResMed, QBE, Navitas, Cochlear and WorleyParsons to name a few, all of which show structural risks to what’s priced into the growth stories of each.

The market has seen top line growth evaporate in recent years, which has led to purchases in the above names at significant premiums in exchange for ‘sustainable returns’ in yield. This trade has finally caught up with market and the shares have been promptly deal with on disappointing numbers.

Given valuation risk in the high P/E names I think I should highlight one that has operation momentum behind it that might actually see it justifying its 23.5 P/E: JHX.

This is an elevated number, but by no means is it over done, and it does have near-term earnings momentum seen in the recent consensus earnings upgrades over the past three releases, which has helped propel JHX to record highs.

It also has operational momentum margins and volumes are poised to expand on the upside as the US recovery widens; increasing the demand of JHX back-end products and that should trickle into top line and bottom line numbers. It is also looking to sustained returns, having publicly stated it wants to increase its payout ratio from 30% to 50% and then 50% to 70% of annual NPAT excluding its asbestos adjustments.

This suggests that JHX has ability to justify it P/E, but it is walking a thin line, having seen its peers punished for missing expectations.

JHX share price

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.

Find articles by analysts