An Up Cycle for Appliance Makers


By Amrit Tewary For household-appliance makers, the wind remains at their backs. Interest rates remain low, the housing market is still robust, and the U.S. economy is growing at a solid pace. That's why we at Standard & Poor's Equity Research maintain a modestly positive outlook on the group.

The group has put in a solid performance thus far in 2004, with the S&P Household Appliances index -- which includes outfits that produce household gadgets and hand and power tools -- up 1.9% through Mar. 19, vs. a 0.1% rise for the S&P 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes). Appliance makers did well in 2003, though they lagged behind the overall market, as the subindustry index rose 20.9%, vs. 1500's 27.4% advance.

What about 2004? We expect the positive factors outlined above to outweigh some concerns about job growth, relatively weak consumer confidence, and industry pricing pressure. We project low- to mid-single-digit growth in U.S. industry shipments of major appliances in 2004. For 2003, we believe that U.S. major appliance shipments rose in the high single digits. In contrast, S&P believes the U.S. economy grew just 3.1% in 2003, on a real (unadjusted for inflation) basis.

REPLACEMENT TIME. According to S&P Economics, housing starts are projected to fall modestly in 2004, following increases in the prior two years. Still, we see appliance sales over the next few years benefiting from recent housing-market strength, as new homeowners may take a year or more to remodel their new homes.

Over the next few years, we expect several factors to help the industry. First, we think demographic trends are favorable for appliance manufacturers and retailers. The targeted 35- to 64-year-old population group is a relatively fast-growing segment in the U.S. and includes those who have reached their peak spending years. We believe this group includes those who are likely to replace earlier purchases of major durable items, such as appliances.

Second, houses have been getting larger in recent years (e.g., in terms of square feet and number of bedrooms), a trend we think will translate into more appliance sales. Lastly, we think the recent rise in home ownership is positive for the industry, as homeowners are more likely to remodel their homes than renters.

STOCKS TO WATCH. What are our top stock selections in the group? We have a 5-STARS (buy) ranking on Black & Decker (BDK

; recent price, $54). We see it gaining or maintaining share in key markets via new products and acquisitions that could immediately add to earnings. Also, we expect its margins to widen as it reaps benefits from restructuring and productivity initiatives.

Our other top pick is Stanley Works (SWK

; $40), ranked 4 STARS (accumulate). We're encouraged by the robust demand seen among Stanley's home-center and mass-merchant customers, and in its industrial tools and security-products businesses. Analyst Tewary follows stocks of household-appliance companies for Standard & Poor's Equity Research


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