Home Improvement Investors Pin Hopes on Housing Recovery

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The housing market recovery is good news for investors in the home improvement sector.

As has previously been reported the housing market is in the early stages of a recovery. And this is good news for home improvement retailers Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW).

Ripe conditions for new construction

The key for housing starts, as investors know, is inventory. And the number of homes for sale has tightened. This is a product of many factors. Obviously, the first is the lingering damage in the housing market since it tanked in 2006. For homebuilders, this was seemingly in another lifetime, and the housing recovery has been a slow train coming.

New housing construction flat lined for several years, but things have picked up in the last year. Also, foreclosure rates have fallen dramatically. Now summer’s here and the time is right for dancing in the streets and new construction. One small banana peel on recovery road could be fast rising mortgage interest rates – a 1% spike in the past 30 days. But some observers believe this is only a speed bump.

Homebuilders’ confident and home prices rising

Home builders recently said conditions for new construction are favorable for the first time since the housing market tanked, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Leading home builders said home prices are rising and the inventory of homes for sale is tightening.

Moreover, Standard & Poor’s Case-Shiller home-price indexes also reported home prices were on the rise earlier in 2013. In fact the rise in prices nationwide was the highest since 2006 – the high water mark before the market tanked - or is that emptied the tank?

In any case, this is good news for home improvement retailers.

Home Depot holds onto the lead

Home Depot has historically been a strong performer. The company has a solid track record of earnings per share growth. This is tightly connected to its longstanding revenue growth. In the past year or so, the share price has risen by about 40%.

One caveat here is the price to earnings ratio of about 22.5 is above the S&P 500's 17.7. So future earnings and revenue growth are needed. Here, the company seems to have a long-term view of gaining market share by making a bigger web footprint while looking north of the border in Canada.

Home Depot seems ready to take advantage of the recent troubles of its key Canadian competitor, Rona (TSX: RON). This outfit is in the midst of restructuring. The big box store announced an executive shake up earlier in 2013. Store closings, job cuts and other cost cutting measures are currently underway. Rona hopes the new strategy will meet the challenge from Home Depot and Lowe's.

The Canadian company reportedly rebuffed an unsolicited takeover offer by Lowe’s in August 2012. So investors can expect Home Depot and Lowe’s to advance in the Canadian market if and when a housing recovery appears in the permafrost. And it will in the fullness of time.

Lowe’s grabs the brass ring of Orchard’s assets

Lowe’s is the second largest home improvement retailer, behind Home Depot. The company recently reported net earnings of $288 for the fourth quarter of 2012. Net earnings for fiscal year 2012 were $2.0 billion – and increase of 6.5% from the previous year.

More important, the company announced in June it intends to buy the assets of Orchard Supply Hardware Stores. Orchard was delisted by Nasdaq back in June as the faltering retailer sought bankruptcy protection. The company was spun off by Sears Holdings in late 2011, and it has been in a downward spiral since then.

Lowe’s will pony up $205 million in cash to have a move on 60 of Orchard’s hardware and garden stores. Lowe’s already has over 100 stores in California. So the Orchard brand will be retained as Lowe’s increases it market share in the golden state.

Lumber Liquidators settles for the bronze

As Home Depot and Lowe’s compete mano a mano, Lumber Liquidators (NYSE: LL) will continue to carve out its niche as the housing markets gets its sea legs. The company’s line is a bit different than Home Depot and Lowe’s. Lumber Liquidators is the largest specialty retailer of hardwood flooring in North America.

The hardwood floor king reported solid first quarter numbers in the spring with its net income increasing to $15.8 million compared to $8.2 million for the same period in 2012. The company expects net sales to come in between $914 to $942 million this year with another 25-30 new stores opening.

The bottom line

Currently, Lowe's appears to be poised to gain the most ground with its acquisition of Orchard and advancing its market share in California. Lumber Liquidators' position as a specialty shop stands to benefit from the ongoing rebuilding from Hurricane Sandy. Finally, Home Depot will see continued revenue and earnings growth provided the housing market recovery gathers steam. All things considered, a housing recovery is underway and this is a boon for investors in the home improvement sector. 

Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe's, and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. 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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