Jefferies turns positive on building materials stocks

22nd May 2015 11:20

Shares of building materials peers Wolseley, Travis Perkins, Howden Joinery and Grafton Group were all on the rise on Friday after Jefferies took positive stance on the sector.With equity markets more buoyant, the broker admitted that its previous valuation metrology was "too cautious", as it upgraded all four stocks by two notches from 'underperform' to 'buy'."Though estimate revisions have generally been negative, valuations have clearly moved on," Jefferies said.The broker said the industry outlook is now attractive. The companies have solid shares in recovering markets, driven by an improving consumer demographics - demand is growing from older, more equity-rich homeowners - and continued investment.After two decades of the merchants' business models having not changed significantly, the broker foresees a period of greater spending in IT, investment in the branch network and the supply chain to "better take advantage of changing customer needs".Jefferies explained: "Increasing the proportion of products sold through e-commerce should be margin accretive as the channel has a lower cost to serve, while more sophisticated IT systems should drive a more efficient supply chain."With a more efficient supply chain, the merchants should be able to reduce their dependence on leasehold properties, or at least reduce the cost of their leases, improving the capital structure and increasing the likelihood of cash returns or acquisitions."Wolseley was up 0.2% in morning trade, Travis Perkins gained 1.2%, Howden advanced 1.9% and Grafton rose 0.4%.