Should You Buy These 3 Stocks on a Housing Recovery?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In my last post on building stocks, I mentioned three stocks that are still worthy of investors’ attention given that they are expected to witness another rally due to an improving housing sector. However, this time around I have pulled out another three names in the space of building stocks. Let’s see if they are expected to rally as well:

Fortune Brands Home and Security (NYSE: FBHS) - The Street expects FBHS to benefit from increased big-ticket remodeling, especially in its cabinet segment. FBHS’ new products at key retailers (continued rollout of cabinetry lines at Lowe’s) and relationships with homebuilders will further enhance this growth. Additionally, higher volume and lower promotional activity (cabinets) will drive margin expansion (primarily in cabinets, and windows and doors). A strong balance sheet (5% net debt to cap) also creates flexibility for acquisitions. FBHS has the capability to invest over $1 billion in acquisitions through 2014 (current estimates for the stock don’t account for any acquisition), and still maintain net debt to capital below 25%. The Street currently estimates $148 million in share buybacks from 3Q/13 - 4Q/14 (full authorization) and thinks FBHS may announce a dividend in 2H/2013 (with ~25% payout ratio). However, at a forward EV to EBTIDA multiple of 10.1x for 2014, only modest upside is expected. Credit Suisse has set a target price of $32, which implies 6% downside from current levels. The $32 target price is based on a forward P/E multiple of 10.5x and a 2014 EBITDA estimate of $518 million.

Mohawk (NYSE: MHK) - Mohawk is well-positioned to take advantage of further improvement in flooring spending driven by the U.S. housing recovery given, its extensive end-market penetration and strong pricing power. The pending acquisition of Marazzi (leader in ceramic tile) adds another positive to these opportunities across channels and distribution networks, and helps to further diversify Mohawk away from carpets. Also, a stronger U.S. and Russia can offset slower European end-markets for the Marazzi platform. However, most of the good news has already been priced in. The stock has rallied 15% in the last 30 days. Credit Suisse has set a target price of $104, which implies 3% downside from current levels. The $104 target price is based on a forward multiple of 9.0x and a 2014 EBITDA estimate of $1.05 billion.

USG (NYSE: USG) - USG is expected to realize higher wallboard pricing based on better U.S. new construction, driving demand for wallboard and increasing capacity utilization. However, it seems as if these assumptions are more than fully reflected in current shares (9.6x PV normalized EBITDA estimate), pointing to very high expectations on future earnings power. In addition, it is interesting to note that only 21% of sales are tied to new U.S. construction, with ~30% tied to commercial, which is expected to remain a drag in 2013. Credit Suisse has set a target price of $22, which implies 25% downside from the current levels. The $22 target price is based on a forward multiple of 8.0x and a normalized EBITDA estimate of $652 million, which is appropriate even with positive expectations for the recovery in new U.S. construction, better wallboard pricing, and increased capacity utilization.

Foolish Bottom Line

It is interesting to note that though all three of the stocks are expected to witness a growth in earnings in the near future, the growth has already been priced in. Therefore, I will recommend a neutral position on these three stocks. 


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