DIY: Rising Tide Lifts Home Improvement
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Do-It-Yourself, like private label, has become not only a trend but a game-changer. In 2012, JPMorgan Chase Card Services survey “What’s on Your Slate” found that more consumers are creating rather than buying services and products. For example, 59% reported they are cost-efficiently setting up a spa at home rather than paying full freight to go to one. DIY online B2C legal service LegalZoom just filed for a $120 million IPO. In its S-1 form it concedes that this DIY space has already filled with competition. This year, the International Consumer Electronics Show featured DIY products, such as from Phone Doctors, for repairing android, windows and iPhones handsets.
This rising DIY tide seems to be playing a part in lifting a number of boats in the $725 billion home improvement category in 2012. Of course, that isn't the whole story but it is a piece that merits analysis. After all, DIY will figure into the value of a growing number of established companies as well as startups.
To begin with, investors have to notice that many companies associated with DIY home improvement entered 2012 with extensive experience. There was no learning curve. That’s because they have had to be early adopters in the DIY niche. Property owners have always been preoccupied with how to enhance the look and value of their investment on the cheap. According to ConsumerReports.org, 80% of the expense for painting a house represents labor. The ability to save that 80% becomes an offer few property owners refused during the worst of the recession and the current uncertain times. Few trust forecasts about when the housing industry will bounce back and at what rate.
Given the influence of DIY on purchasing habits, the question investors should be asking is: Why isn’t every company which could be in this sector not there or not expanding its piece of it? Clearly, there's that opportunity for a distressed company like Sears Holdings (NASDAQ: SHLD). Its roots are in DIY products such as Craftsman drills. Retail expert Laura Heller, who writes for FORBES, is among those recommending Sears lop off soft goods and return to hard goods. That should be its core competence. Right now, Sears stock, like its turnaround, is stuck. In the 52 week range of 28.89 to 85.90, the price per share is at 54.68.
The second question is: What companies already doing well in DIY are positioned to continue this good fortune and what could be the numbers for that? Most of them, yes, enjoyed a 2012 bounce.
Among those with the most potential are paint companies whose retail operations bundle complimentary consultations about interior decorating with sale of the product, both in brick and clicks.
A leader for that is Sherwin-Williams (NYSE: SHW). From the get-go, it recognized the power of consultative selling and set up its own stores in 1866. Today, read its help-wanted ads for its retail operations and it’s obvious the company is recruiting those with design expertise. Providing this value added extends online with its Decorating Store for both residential and commercial customers. The site has an Ask the Expert section which provides a response in 2 days. The stock is at 122.72, with a 52 week range of 60.49 to 125.20.
No slouch in helping customers to help themselves, Sherwin-Williams’ rival Valspar (NYSE: VAL) hammers that as its mission in Lowe’s (NYSE: LOW) which is its exclusive retail distributor, in TV commercials, and with a downloadable app. And I view it as doing all this outreach in a more comprehensive and theatrical way than staid Sherwin-Williams. Never forget that the heart of retail beats to provide a good show. Valspar’s website provides all the right categories of how-to with exactly the right language. Those include:
- “You bring the confidence. We’ll add the Know-how.”
- “Interior ‘How-To’”
- “Exterior ‘How-To’”
- “Paint Calculator”
- “See How-To Videos”
Valspar is at 51.35, with a 52 week range of 27.44 to 52.96. According to StockCharts it’s one of the most solid of the S&P 400 midcaps. It will be interesting to observe how Sherwin-Williams and Valspar enhance their consumer DIY relationships around the world. Both are well situated in emerging economies. Valspar could continue to gain an advantage through exploiting mobile technology. One just has to think about how a lack of a mobile infrastructure is negatively impacting Facebook.
Witth much of the litigation threat about their legacy in lead paint behind them, paint stocks have less risk. The uncertainty is when and how powerfully new commercial and residential construction and sales of existing residential pick up.
Big Box home improvement centers Lowe’s and its competition Home Depot (NYSE: HD) have also participated in the DIY rally. Some stock watchers assess that even with that increase in share price, the two are undervalued. Lowe’s is at 29.62, with the 52 week range of 18.07 to 32.29. Home Depot had been at 50.34, with the 52 range of 28.13 to 52.88. After its revenue increase of 5.9% missed consensus, the stock went down to 49.88. But it estimats 4.6% sales growth for 2012. Since 2005, Warren Buffett has held positions in both.
Together they have more than a 16% of the home improvement market. When GE alumnus Bob Nardelli headed to Home Depot, service for both consumers and contractors took a secondary role to cost reductions. At that time I was a contract employee. Employee morale seemed low and customers, both DIY and contractors, were frustrated with the poor service. After Nardelli left and Frank Blake took over, differentiation between the two big boxes in customer service lessened.
Today, they also seem more similar than different in other factors. Those include how effectively they manage their supply chains, locate stores, prices, and traffic on websites. Both essentially operate in North America. That means no wonderful earnings surprises from emerging markets aping middle class styles. Both are predicted to grow. Anonymous author “Investment Underground” projects sales growth for Lowe’s at about 3% with operating margins upward from 2011’s 6.8% and Home Depot at about 5% with operating margin sustained at the current 9.2% or going higher, after 2011’s 7.3%. The one difference between the two may be in layout. The Lowe’s store seems more thought out. There seems to be less clutter and better lighting. Consequently the shopping experience is more pleasant.
For investors who want only one stock in this category, the issue is likely to come down to current and future value. Lowe’s is about a year behind Home Depot in shuttering poor performing stores and reducing overall expenses. Its same store sales have been flat v Home Depot’s rise of 3.4% for 2011. Therefore, its stock price is only up about 5% from 2011 v 25% for Home Depot. That could make Lowe’s a good buy with significant growth potential ahead. Also, its net debt at 38% of equity gives it lower leverage than Home Depot’s at 49%. However, investors could follow Buffett and take long positions in both.
janegenova has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sherwin-Williams and The Home Depot. 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.If you have questions about this post or the Fool’s blog network, click here for information.