Morgan Stanley: Building materials slightly beat expectations in the third quarter as rising energy prices squeeze margins again

Why did third-quarter results beat expectations without lifting earnings forecasts?

Key performance metrics for companies that have reported, as tracked by Morgan Stanley, beat expectations by a median of 0.5%, but median earnings per share forecasts for fiscal 2027 were cut by 1%. Outlook commentary on earnings calls was mixed, and companies generally did not raise guidance.
Growth drivers have shifted: in the second quarter, a broad-based recovery in volumes was supported by catch-up work following improved weather and some advance purchasing; the third-quarter beat so far has been driven mainly by prices.
Bricks and tiles are a notable exception: performance metrics at all three companies tracked fell short of expectations, with a median miss of 12.5%. Rising energy costs and slow price increases are eroding margins, and median earnings per share forecasts for the sector for fiscal 2027 were cut by 22.2%.

As of 2 November, the median price of the 28 inputs tracked by Morgan Stanley since the start of the fourth quarter was 11.9% above the third-quarter average and up 71.6% year on year, compared with a 50.6% year-on-year increase in the third quarter. European natural gas and electricity were the main drivers.
Meanwhile, the median year-on-year increase in cement prices across 12 markets was 3.7%; in Germany, prices rose just 0.1%, with the year-on-year growth rate down 1.5 percentage points from three months earlier. Modest selling price increases mean energy-intensive producers face margin pressure before they can complete price increases.
Drawing on the experience of 2021–2022, the bank says heavy building materials producers typically first suffer margin contraction before potentially more than recovering costs through price increases; light building materials companies generally protect margins more quickly. However, brick and tile producers still struggled to restore margins when input costs fell after 2023, and companies' ability to cut fixed costs and mitigate costs also affects the outcome.

The eurozone construction confidence index fell to -5.9 in October, its lowest since December 2020 and 5.8 percentage points below its ten-year average. The order-book indicator edged up to -14.5 from -15.3 in September, but remained 8.2 percentage points below its ten-year average, pointing to weak activity in 2027.
The eurozone construction PMI was 43.4 in September, up from 43.0 in August but still below the 50 expansion-contraction threshold; new orders were at 43.7, down 0.5 points from three months earlier. Housing was the weakest segment, with a residential PMI of 38.9; Germany's residential PMI was just 33.0.
Civil engineering is also weakening: eurozone confidence in the sector fell to -7.0 in October, its lowest since January 2021. The UK construction PMI rose 7.7 points over three months to 46.1 in September, with broad-based improvement, but remained in contraction territory.

Total US construction spending fell 2.7% year on year in September, a wider decline than the 0.7% fall in August. Nonresidential spending rose 1.8%, with office and power spending up 33.4% and 11.1%, respectively; together, their contribution to total spending growth exceeded that of nonresidential construction as a whole.
Residential spending fell 8.8% year on year, mainly weighed down by renovation spending, which fell 18% year on year, compared with a 3.5% decline in August. Housing starts fell 7.3% year on year in September, including a 24.9% decline in multifamily starts.