Heightened geopolitical risks are feeding uncertainty and weighing on economic fundamentals. . Most players have tightened discipline regarding growth projects. We expect capex to remain almost unchanged, sustained by compliance with more stringent environmental regulation.

Flat housing starts and a shift toward entry-level homes will likely challenge sales growth and margins. The housing cycle may have peaked, leading us to expect only marginal sales growth from new homes, mostly on price, not volume. An economic slowdown will likely reduce R/R spending, previously a strong demand driver that has helped to augment demand, given flat housing starts. A weaker economy may also shift the sales mix to lower price/margin products. After increasing debt on acquisitions, we expect companies like Vulcan Materials, Martin Marietta, Standard Industries, and Fortune Brands to use cash flow to reduce leverage. With builders focusing on entry-level, materials used per new home will be reduced and there will be fewer premium products installed, meaning narrower margins for building materials companies. While R/R spending has been robust for the past two years we expect growth will slow, albeit staying slightly positive.

Building material companies are not as leveraged as in the last downturn. New and existing housing inventory is tight and household formation should help home demand. Home values, access to equity lines of credit, still-low unemployment, and wage stability should minimize any downturn’s length and impact. Most companies were able to offset tariff effects (with a lag) with prices and lower commodity costs in 2019. But any new or increased tariffs, amid ebbing demand, would be difficult to offset. Also, we don’t expect further relief from commodity prices in 2020.