Should You Build Out Your Portfolio With These Home Improvement Stocks?

How high is the ceiling for these well-performing equities?

Anthony Russo
    Jul 20, 2020 2:25 PM  PT
Should You Build Out Your Portfolio With These Home Improvement Stocks?
author: Anthony Russo   

After a pandemic triggered a sell-off in March, home improvement stocks have been rebuilding their shareholder value steadily, adding new resistance floors and creating what is hopefully a more solid pricing foundation. Enough forced metaphors; let's get to the stocks.

Hardware in Hard Times                     

When you have to shelter-in-home, you start to realize just how much can be done to improve your surroundings. Americans have used this time at home to renovate their houses—whether it is putting in a new bathroom or taking up gardening, home improvement has been a hobby that has helped keep people sane. As a result, a Mastercard SpendingPulse report showed that combined online and offline hardware sales soared 36% in May.

Another report from the mobile market intelligence firm Apptopia revealed that app downloads for the home improvement market leaders Lowe's Companies, Inc. (NYSE: LOW) and The Home Depot, Inc. (NYSE: HD) surged to record highs in April. Home Depot took the lead with 706,000 downloads, while Lowe's clocked in second with 527,000 downloads in the month.

Home improvement has been on the rise long before Covid-19 hit the United States. According to data from iPropertyManagement, U.S. home improvement sales hit $394 billion in 2018. The research also found that consumers spent 17% on improving their homes in 2018 versus the previous year.  Given the sky-high housing prices, American homeowners are sticking with their first homes instead of moving into new places.

Most home improvement stocks have recovered, experiencing massive gains since the market sell-off. Home improvement stocks were a great and obvious buy at the end of March. But what about now?

Hold Depot

The sector leader The Home Depot, Inc., (NYSE: HD) maintained 29% of the market share for the overall building materials and garden supply retail sector in 2019, as reported by Forbes. The Georgia-based company has seen its stock rise from $150 per share at the end of March to now $260 per share, soaring past its pre-virus Jan. high of around $247 per share.

Though income for the quarter ending on May 5 slipped to $2.25 billion, or $2.08 per share, investors have still been bullish on the stock. To be fair, there are plenty of reasons: for one Home Depot's sales in the period rallied 7% year-over-year to $28.26 billion, beating analysts' projections of $27.54 billion. Also, Home Depot spent $850 million on expanding employee benefits in the period which was bad for profit, but good for PR.

However, one problem with Home Depot is its lack of reliance on the so-called "do-it-yourself shoppers," which is just 55% of its customer base, notes Bank of America.

"Given Home Depot's higher reliance on professional customers, we continue to rate HD as neutral, as the longer-term implications of high unemployment/recession could slow growth in professionally-driven projects," analysts at the Bank of America said.

With Home Depot now hitting new all-time highs, investors shouldn't be jumping all over the stock at this price.

A Do-it-Your-Self Stock

Right behind Home Depot in the market is Lowe's Companies, Inc. (NYSE: LOW), which has also been on a crazy run March. After falling to a low of $60.00 per share in the virus outbreak month, shares are now up more than double since.

Home Depot has performed well during the pandemic, but Lowes has performed even better. In the first quarter, Lowe's surprised Wall Street by generating revenues of $19.68 billion, up 11% year-over-year on adjusted earnings per share of $1.77. Analysts polled by Refinitiv were expecting revenues of $18.32 billion on adjusted earnings of $1.32 a share. Analysts also expected same-store sales to rise just 3% compared to 11% Lowe's posted. Lowe's has increased its spending on employees and communities during the pandemic to $450 million.   

Bank of America rates Home Depot as neutral has Lowe's as a buy. The firm notes that Lowe's customer base consists of more "do-it-yourself shoppers" which range from 75% to 80% of all customers.

For this reason, analyst Chuck Grom at Gordon Haskett upgraded the firm to a buy with a price target of $151 per share in early June. He also said that Lowe's can narrow the sales gap with Home Depot through digital sales and traction with professional customers. Grom said the consumer's flood to Lowes.com through May could make "e-commerce an even larger comparable sales contributor in the second quarter of 2020 versus the 390 basis points it helped drive last quarter." 

At $144 per share, ill place a buy on Lowe's. Shares of Lowe's are up 20% YTD.

LOW.png 

(Yahoo Finance!: LOW)

Strong Earnings Lifts Floor & Decor 

As we get into some smaller home improvement companies, look to Floor & Decor Holdings, Inc. (NYSE: FND). The Georgia-based company, which specializes in providing tile, wood, laminate, and natural stone flooring products, has been on a solid run since late April and its stock is now approaching February highs.

The surge in the stock market from Floor & Decor was spurred on by a strong financial report and the announcement of a secondary offering. In late April, Floor & Decor posted net sales that grew 16% to $554.9 million in the quarter ending March 26 on EPS of 35 cents. The next month it announced that certain stockholders including some directors and officers of the company, as well as the investment firms Ares Management Corp. (NYSE: ARES) and Freeman Spogli Management Co., L.P., were offering 4.97 million of Floor & Decor's shares. Now, the stock trades at a 21-week high. The company has only been public since April 2017.

However, the floor may fall out from under the company in due time. In the final six days of March, comparable sales plunged 46% from the same period in 2019, although this is clearly a result of the pandemic lockdowns. Still, shareholders will eagerly wait for Floor & Décor's second-quarter fiscal 2020 results on July 30. Until then, the stock is a hold. Shares of Floor & Decor are up 22% YTD.

 Yahoo Finance: FND).png

(Yahoo Finance!: FND)

Plumbing Sales Prevent Masco's Stock From Plunging

Another company in the home improvement sector Masco Corp., (NYSE: MAS) has rebounded and even surpassed its January and early February trading levels.

This is thanks to a solid first quarter, in which it generated $1.58 billion in sales on adjusted earnings of 46 cents a share. The results surpassed Zacks' Equity Research sales expectations of $1.52 billion and beat adjusted earnings by 28%. Michigan-based Masco attributed the growth in the quarter to its North American plumbing products, as well as paint and other coating products.

While the stock has been gaining momentum since early May, the company did warn that revenue could plunge by 15 to 20% in the second quarter. However, its plumbing segment came to the rescue again with more people than anticipated clogging their drains during the lockdown.  Masco expects June revenue to fall by only 8%. That's mainly because sales in its plumbing segment are now expected to only decline by just 19% versus the previous 30 to 35% it was guiding for earlier.

As Masco gets set to report its second-quarter results on July 30, investors will hope to receive more clarity on the company and its expectations for the rest of 2020. Right now, the stock is a hold at $52 per share. Shares of Masco are up nearly 11% YTD.  

Lumber up 181% Since Early May

A Small Market Cap flooring surface provider Lumber Liquidators Holdings, Inc., (NYSE: LL) has been picking up some serious momentum in the past couple of weeks. The stock in Lumber has now jumped 36% from its close on July 13 after analysts at Loop Capital upgraded the firm from a hold to a buy with a price target of $18 per share. The stock is trading even higher than that currently.

Tariffs on imported goods have allowed Lumber to sell products at strong prices, helping bolster gross profit margins, according to a report from TheFly.com. The investment bank Loop added that when Lumber reports its second-quarter financials in early August, profits will surpass expectations and that the pandemic could have a "positive impact" on the stock.

However, not everyone seems to believe that will be the case for Lumber, as the consensus on the company is that it will generate a loss of 20 cents per share, according to data compiled by Yahoo! Finance. Lumber is finally projected to turn a profit ( just 1 cent per share) in the third quarter.

Meanwhile, Lumber was able to generate adjusted earnings (excluding non-recurring items) of 44 cents, crushing the FactSet consensus of 3 cents. It did, however, miss on sales with $267.4 million in the quarter versus the FactSet consensus of $272.2 million.

It will be interesting to see what's in store when Lumber reports its second-quarter results on August 5. While shares of Lumber are up a whopping 181% from its close on May 4, it's probably best to hold until then. The stock is now trading near a two-year high.

 Yahoo Finance: LL.png

(Yahoo Finance!: LL)

No doubt, the home improvement industry has enjoyed some strong gains this year. But the question is for those that are trading at either all-time or their highest levels in years and if it's sustainable in the short term or if they'll soon run out of luck. I, of course, have concerns that those stocks will soon hit their peaks with the economy reopening in the second quarter. People spent less time at home trying to get back to their normal, which may cause some home improvement firms to see less demand in the period. 

The one stock I do recommend buying is Lowe' s; others I think could be better bets in the future because clearly, the industry isn't going anywhere with people staying in their first homes and enhancing those instead of buying new ones.

Surging Home Sales Might Contribute to Home Improvement Growth

As Covid-19 spread at uncontrollable heights earlier this year in New York City, residents started to make requests to move out of the epicenter. According to The New York Times, nearly two-thirds of 81,000 mail-forwarding requests to the U.S. Postal Service in New York City were from residents looking to move out of the Big Apple. 

Shark tank investor Robert Herjavec told CNBC earlier this month that he thinks that Covid-19 has altered desires towards city living and predicted the change will "be a trend for a while."

"Everybody wants to leave large urban communities and move out into the suburbs," He said on CNBC's Squawk Alley.

Herjavec added, "And I think urban real estate is going to hurt for a little bit." 

As a result, although the official government tally hasn't been released, sales of newly built homes skyrocketed 55%, according to a monthly survey by John Burns Real Estate Consulting, the largest monthly rise since 2005. However, the surge in demand could for home sales be short-lived if Covid-19 forces another economic shutdown and a higher unemployment rate, according to CNBC. Jim Stack, the head of InvestTech Research, is bullish on home improvement but less so on home sales.

"We think home sales will fall dramatically, but home-improvement expenditures will increase as people choose to stay in their own home longer," he said, as cited by Barron's.

As Covid-19 continues to spread across at record heights in the U.S., home improvement should see up and down demand in 2020. Long term, I am bullish on the industry. 

Short term, however, I think that many home improvement stocks have hit their ceiling.


YOU MAY LIKE