Can't Go Wrong Owning Cabinetmakers in a Housing Recovery

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

I think it's important for investors to always look at the big picture and then see which companies will benefit. We are still in the early stages of the housing recovery and the obvious choice is the home builders. The problem is that there are many home builders and it's tough to determine which one is the best choice for your portfolio. I would much rather focus on what goes into a new home. The companies that supply home builders with kitchen cabinets and bathroom fixtures will benefit as all home developers turn to these companies to finish their homes.

The supplier the builders call

Masco (NYSE: MAS) is one of the world's largest manufacturers of brand-name products for the home improvement and new-home construction markets. Masco is comprised of over 20 companies with 60 manufacturing facilities in the U.S. and over 20 in other parts of the globe. The company's business segments include cabinetry, plumbing products, installation, decorative products like paint and primer, and specialty products such as windows and doors. Its divisions include Masco Cabinetry, Delta Faucets, Masco Bath, Masco Contractor Services, Behr Paint, and Arrow Fasteners.

In the first quarter, operating income rose 19% to $140 million. Operating margins were the highest since 2007 at 7.5%. Earnings came in at $0.13 per share, but missed estimates by $0.01. Earnings improved by 85% compared to the same quarter in the prior year. Results improved because of the housing recovery in North America, the company's turnaround efforts and cost savings. Net sales rose 3.9% to $1.9 billion.

Masco expects continued improvement in the North American market for the rest of 2013. Repair and remodeling improvements are expected to pick up along with new-home construction. Last year, the company estimated that 75% of its revenue came from home repair and remodels and 25% from new construction. Prior to the housing crash, the mix was 55% home repair and remodels and 45% new-home construction. Margins are higher in new construction for Masco and an increase in housing starts is a positive.

You might make a fortune with this company

Fortune Brands Home Security (NYSE: FBHS) is best known for its doors, windows, locks, faucets and cabinets. Its brands include Master Lock, MasterBrand cabinets, Moen faucets, Simonton windows, and Therma-Tru doors.

In the first quarter, net sales increased 11% to $890 million. Earnings were $0.22 per share compared to $0.08 in the prior year. The company also purchased WoodCrafters Home Products, a leading manufacturer of bathroom vanities. It also paid its first quarterly dividend. The plumbing and accessories division was the strongest segment for the company, with sales increasing 26%.

Fortune Brands expects sales to increase 9% to 11% for this year. The company expects earnings to be in the range of $1.23 to $1.33 per share compared to $0.89 last year. The acquisition of WoodCrafters will add $230 million in revenue as well as give the company manufacturing facilities in Texas and Mexico. This acquisition further strengthens Fortune Brands' position in kitchen and bath cabinets.

Cabinets are this company's specialty

While the other two companies are diversified, American Woodmark (NASDAQ: AMWD) specializes in cabinets for kitchens and bathrooms. The company sells more than 435 cabinet lines in a wide variety of design materials and finishes. American Woodmark sells its cabinets through a network of independent dealers and distributors as well directly to major builders, Lowe's, and Home Depot. The company has nine manufacturing facilities and builder service centers in the U.S.

In its most recent quarter, net sales rose 26% to $171.1 million. The company earned $0.34 per share compared to a loss of $0.11 per share in the prior year. Gross profit in the quarter amounted to 18.9% of net sales.

American Woodmark is benefiting from the tailwinds in the housing industry. Last year, the housing rebound helped boost new construction sales by 40% for American Woodmark. American Woodmark has expanded its dealer network and gained market share in the new-home construction sector. Double-digit sales gains are likely to continue as housing continues to recover.

Foolish assessment

For 2012, housing starts were 780,000. This was an increase of 28.1% from 2011 where builders started only 608,800 homes. In May housing starts rose to 914,000. Housing starts are heading it the right direction, but the cabinetmakers are eager for a return to pre-crisis levels. If housing starts return to pre-crisis levels of 1.4 million to 1.5 million, housing starts would double from last year's level and significantly benefit these cabinetmakers.

Of the three companies, my favorite is Fortune Brands. The acquisition of Woodcrafters was a great move and will give the company a low-cost manufacturing facility in Mexico. I like its brand portfolio and have been a buyer of the company's products.

Masco would be my second favorite due to its diversification. American Woodmark is dependent solely on cabinet sales. Masco can see greater benefits with a diversified product base in a housing recovery.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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