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Masco Bulls Eye Second Leg of Housing Rebound: EcoPulse

April 15, 2014

Masco Bulls Eye Second Leg of Housing Rebound

A construction worker guides a pre-built exterior wall panel outside Tiskilwa, Illinois. Photographer: Daniel Acker/Bloomberg

Shares of Masco Corp. (MAS:US), maker of faucets and cabinets, are poised to beat the market as investors bet on rising sales of new and existing U.S. homes.

Housing-market turnover is the “macro variable that really drives Masco’s stock,” according to Walter Todd, who oversees about $950 million as chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina. As a result, investors who are “positively inclined” about further improvements are considering shares of the Taylor, Michigan-based company, he said.

“The thought process behind buying this stock now is the housing recovery will have another leg up,” Todd said, adding that he currently holds shares of the manufacturer.

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Masco’s products, which include Delta faucets, KraftMaid cabinets and Behr paint, sell at home-improvement retailers such as Home Depot Inc. (HD:US) and Lowe’s Cos. (LOW:US) The company, which declined to comment, is scheduled to release first-quarter results on April 24. The implied one-day stock-price move after it reports earnings is 4.7 percent (MAS:US), according to data compiled by Bloomberg.

The company’s stock -- which closed at $21.53 yesterday -- has stalled in the past year amid “considerable moderation” in new construction, said Mike Wood, an analyst in New York at Macquarie Group Ltd.

Lagging Behind

Its shares have risen 6.8 percent (MAS:US) since April 12, 2013, lagging behind the Standard & Poor’s 500 Index’s 15 percent gain as of 10:56 a.m. in New York. Sales of existing homes and new one-family houses totaled about 5 million in February on a seasonally-adjusted annualized basis, down from almost 5.4 million the same month a year ago, according to data from the National Association of Realtors and the Department of Commerce.

While Masco’s stock has “flatlined” for almost a year, investors now are signaling some optimism, according to Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. Shares rallied 3.5 percent (MAS:US) on Feb. 11, the day after the manufacturer reported fourth-quarter income of 15 cents a share, less than the 16-cent consensus of analysts’ estimates compiled by Bloomberg.

“Investors are giving the company the benefit of doubt, even with this earnings miss,” Stellakis said. This shows they’re valuing it higher; other bullish signs will be if the stock trades above a May 2013 peak in the short term and an April 2010 level longer term on a relative basis, he said.

Outperform Recommendation

Wood maintains an outperform recommendation on Masco largely because he believes its sales will beat expectations as housing -- and particularly new construction -- shows signs of accelerating. This segment could grow in the “low teens” this year, according to his forecast.

Meanwhile, repair and remodeling work already has rebounded and could increase 8 percent in 2014, with the prospect of an upward bias based on information from electrical-equipment and lighting distributors about the sales environment, Wood said. By comparison, Macquarie’s March survey of buy-side investors showed they expect a 7 percent increase, up from a 5 percent forecast in September.

Home renovations are “perhaps more meaningful” to companies such as Masco, Todd said. “As people see the value of their home go up, they get more comfortable spending on that asset.”

Todd’s fund holds manufacturers Fortune Brands Home & Security Inc. (FBHS:US), PGT Inc. (PGTI:US) and American Woodmark Corp. (AMWD:US), in addition to retailers Home Depot and Lowe’s.

Rising Investment

Private-residential fixed investment -- including construction and major replacements -- rose about 13 percent from a year earlier to an annualized $531.5 billion for the three months ended Dec. 31, according to data from the Commerce Department. Advance first-quarter figures are scheduled to be released April 30.

Even so, “a lot of optimism is already baked into the price” of housing-related stocks, said Marty Leclerc, founder and chief investment officer of Barrack Yard Advisors, which oversees $270 million in Bryn Mawr, Pennsylvania. Masco needs to double its earnings -- an estimated $1.11 a share in 2014 -- to return to its 2006 level of $2.22, while the stock is trading at 29 times its price-to-earnings ratio, he said. That compares with a multiple of 18 for the S&P 500, according to his calculations.

Housing Crash

In addition, confidence among U.S. homebuilders rose less than forecast in April, as sales and prospective buyer traffic stalled. The National Association of Home Builders/Wells Fargo builder sentiment gauge climbed to 47 from a revised 46 in March that was weaker than initially reported, data from the Washington-based group showed today.

Masco doesn’t meet Leclerc’s criteria for investment and he’d consider holding it only if he thought housing was going to rally back to “exuberant” levels last seen in 2005-2006, he said. Sales of new and existing homes peaked at about 8.5 million on a seasonally-adjusted annualized basis in July 2005, before this market crashed.

Without signs of such a “gangbusters” recovery, housing-related stocks are “very speculative ways to play this theme,” Leclerc said. If investors think household formations will increase, Target Corp. (TGT:US) may provide a more attractive opportunity because it sells home furnishings, he said.

Housing Collapse

While many investors won’t be compelled by valuations for Masco and some of its competitors, these companies are “much better today for coming through the housing collapse,” Todd said. “They got lean and mean with their cost structures,” giving them earnings leverage.

There are other reasons to be bullish. Amid a backdrop of increased turnover in existing homes and construction of new ones, consumers are trading up to higher-end products and Masco is “positioned to capitalize on this,” Wood said. Strength in residential remodeling is Wood’s “top investment theme” now, benefiting Masco and Deerfield, Illinois-based Fortune Brands, maker of cabinets, plumbing supplies and windows.

After harsh winter weather stymied first-quarter activity, “there’s a pent-up nature to demand right now,” Wood said.

Masco expects “positive trends” to continue, including new construction, repair and remodel activity, home-price appreciation and big-ticket spending, Chief Executive Officer Keith Allman said on a Feb. 11 conference call.

JPMorgan Chase & Co., the biggest U.S. bank, also is optimistic. “We have growing confidence in the economy,” Chief Executive Officer Jamie Dimon said in an April 11 statement. “Housing has turned the corner in most markets.”

Wood forecasts Masco’s sales this year will exceed the $8.8 billion consensus of analyst estimates, which would be about 8 percent higher than 2013 revenue. Meanwhile, Todd is looking ahead to the second half of this year for further improvements.

“We like the home-improvement story in 2014,” Todd said.

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editors responsible for this story: Anthony Feld at afeld2@bloomberg.net Melinda Grenier, Mark Rohner


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Companies Mentioned

  • MAS
    (Masco Corp)
    • $24.07 USD
    • 0.22
    • 0.91%
  • HD
    (Home Depot Inc/The)
    • $98.28 USD
    • 0.71
    • 0.72%
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