RBC Turns Cautious on Building Products Sector: Housing Recovery Expectations Fade, Multiple Stocks Downgraded

RBC Capital Markets turned cautious on the building products sector ahead of the third-quarter earnings season, cutting earnings estimates and downgrading multiple stocks, as high interest rates, inflation and weak housing demand could persist through 2027. Chief analyst Mike Dahl said that with housing recovery expectations continuing to cool, RBC has effectively removed organic volume growth from its model. The firm now expects U.S. single-family housing starts to fall about 5% in 2026 and another 1% in 2027; repair and remodeling spending is expected to grow just 1% this year and be roughly flat next year. These revisions are significant for investors because Wall Street expectations may still assume a stronger housing market rebound than RBC believes is possible. The firm cut its 2027 average earnings per share estimate for building products manufacturers by about 10% and its EBITDA estimate by 7%. RBC believes manufacturers are especially vulnerable to rising raw material costs and limited pricing power, and overall prefers distributors in the current inflationary environment. RBC downgraded Builders FirstSource (BLDR.US) to "Sector Perform" from "Outperform," slashing its price target to $62 from $88. The firm expects 2027 EBITDA of $1.06 billion, down 16% from its previous estimate and below the $1.21 billion consensus. RBC cited worsening housing starts, intense competition and pressure on gross margins. Higher leverage could also limit share buybacks and other capital allocation. Owens Corning (OC.US) was also downgraded to "Sector Perform" from "Outperform," with its price target cut to $127 from $172. RBC believes the roofing business could fare better than feared in the third quarter, but weakening demand, distributor destocking and rising oil and asphalt costs will weigh on the fourth quarter and 2027. Its 2027 EPS estimate was cut to $10.16 from $12.20, versus the $11.81 consensus. The firm is more bearish on Mohawk Industries (MHK.US), downgrading the flooring manufacturer to "Underperform" from "Sector Perform" and cutting its price target to $112 from $130. RBC expects weak flooring demand to collide with rising oil, diesel and natural gas costs. Its fourth-quarter EPS estimate is $1.42, well below the $1.69 consensus; its 2027 estimate is $8.97, versus Wall Street's $10.06. RBC is most pessimistic on Whirlpool (WHR.US), maintaining its "Underperform" rating and cutting its price target to $22 from $32. Its 2027 EPS estimate is just $1.15, compared with the $3.53 consensus. The firm cited weak appliance demand, competitive pricing, potential Canadian tariff costs and potentially higher steel costs after contract repricing. There are still top picks. Ferguson Enterprises (FERG.US) is RBC's favorite long, rated "Outperform" with a $286 price target, reflecting strong performance in large projects and HVAC operations. RBC also maintained "Outperform" ratings on Fortune Brands Innovations (FBIN.US), Core & Main (CNM.US), SiteOne Landscape Supply (SITE.US) and QXO (QXO.US), but warned that QXO could face near-term roofing headwinds and macroeconomic challenges. The broader message from Dahl's report is that the industry's hoped-for 2027 recovery is being pushed further out. RBC's revised construction forecasts show 2027 single-family housing starts at about 890,000, below its previous forecast of 5% growth; repair and remodeling spending is now expected to be roughly flat, rather than the previously expected 3.1% growth. For investors, as the sector waits for a housing demand recovery, company-specific pricing power, exposure to a stronger non-residential market and the ability to protect margins are becoming increasingly important.