Travis Perkins: Rebuilding confidence brick by brick

Investors could be forgiven for losing patience with builders’ merchants, but Travis Perkins (LSE:TPK) may finally be turning a corner.

JP Morgan keeps the stock on its “positive catalyst watch”, expecting third-quarter results to show the benefits of management’s push to win back lost market share.

The broker argues that cost cuts and tighter control of working capital are beginning to bear fruit, even as construction volumes across Europe and the US remain sluggish.

The backdrop for the sector is hardly inspiring. Analysts at JP Morgan see “limited earnings momentum” for European building materials companies this quarter, with the balance of risks still leaning to the downside.

Volumes remain weak on both sides of the Atlantic, though in the US at least, activity has stopped getting worse. Better weather compared with last year could also offer a small tailwind.

Travis Perkins’ story is partly one of self-help. The company has been streamlining its branch network, refocusing on trade customers and shoring up margins in its core merchanting arm.

These efforts should allow it to defend profitability even if demand stays flat through the winter. Investors will be watching for evidence that its recent digital investments and product range rationalisation are starting to pay off in improved service levels and pricing discipline.

Across the rest of the sector, JP Morgan continues to favour the “heavyside” names such as Heidelberg Materials and Holcim, both of which have slipped from their September highs and look to have managed expectations sensibly heading into results season.

CRH may also get some help from the mild autumn, which should support outdoor construction work in the US.

Among the “lightside” specialists, those exposed to insulation and interiors, Rockwool and Kingspan are expected to hold the line, with forecasts already reset at their half-year results.

Saint-Gobain, which reports only sales, offers valuation support after a recent share price dip but little by way of near-term catalysts.

Less reassuring are Sika and Geberit. The Swiss groups face margin and volume pressures respectively, and JP Morgan warns that neither is likely to escape the broader sector malaise.

After a 14% rally for European building materials stocks this year, expectations have crept up. A round of cautious updates could easily unwind some of those gains. But for investors with patience, Travis Perkins’ slow rebuild may just be getting interesting.