Coverage
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We recently launched coverage of the Building Products sector, a new space for Vertical Research Partners. Our universe includes manufacturers, distributors and contractors across residential and non-residential markets. The last 5+ years have been a wild ride for Building Products companies, with unprecedented volume and price growth in 2020-2022,followed by a normalization as interest rates started climbing in 2021. Currently, there is a bifurcation in demand trends across markets - home improvement/non-residential repair & remodel markets appear to be bumping along the bottom, while new construction is more challenged. At the end of the day, home and business owners are struggling with affordability challenges and uncertain macroeconomic conditions, which are leading to deferrals of new construction activity and large-ticket discretionary projects.
We have the highest conviction that home improvement demand will turn positive in 2026 after declining for 3-4 years through 2025. Additionally, we expect non-residential markets to remain resilient (modest growth). For new residential construction, we forecast another year of declines for starts and completions in 2026, led by single-family weakness, which will continue to pressure revenue for suppliers into that channel. Overall, we expect supplier revenue, encompassing our forecasts for all markets, to be flattish in 2026 (following a low-single digit decline in 2025) and grow by a low-to-mid single-digit rate in 2027.
Our top picks are: (1) AWI – we view the stock as a core holding within the sector due to its industry-leading pricing power, limited cyclicality in Mineral Fiber, attractive organic/inorganic growth in Architectural Specialties, innovation, namely Templok, and room for margin expansion; and (2) MHK – a strong operator in a very competitive category that is well positioned to expand market share and increase margins and earnings when demand accelerates due to abating secular headwinds and years of cost reduction efforts; we view MHK as the best, and cheapest (valuation), way to play a recovery in existing home sales.
