Resurgent Housing Sector Favors Masco

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Recent rosy figures from the US housing sector bode well for Masco Corporation (NYSE: MAS), which is engaged in the manufacturing, distribution, and installation of home improvement and building products. Its product line, which among other items includes windows, architectural coatings, faucets, and cabinets, is distributed through multiple wholesale and retail channels. Masco also sells directly to home developers.

One of Masco’s major retail conduits is Home Depot (NYSE: HD), which has 2,252 locations across the U.S., including Puerto Rico and the American territories in Virgin Islands and Guam. Home Depot's clientèle is primarily comprised of do-it-yourself and do-it-for me customers, as well as professional builders. This spring, the home improvement retail chain is increasing its seasonal hiring to 80,000 workers; it had some 70,000 seasonal hires last year. Home Depot is also planning 3,500 additional stores in New Jersey and New York where repairs on the damage of Hurricane Sandy are continuing. The company’s revenues in the previous two quarters are on an uptrend, with a 1.7% gain in the 2012 second quarter and a 4.6% increase in the third quarter to $18.13 billion.

Recently released statistics paint a bullish picture for both Masco and Home Depot.  Data from the US Commerce Dept. shows that housing starts across the country surged by 12.1% in December 2012 to an annual rate of 945,000 units, the fastest pace since June 2008.

Opportunities from New Construction and Renovation

This uptrend in new home construction can be expected to continue this year as market inventories of previously owned homes dropped 8.5% to an 11-year low of 1.82 million units in December, figures from the National Association of Realtors show. Meanwhile, sales of previously owned residences are accelerating, which was registered at a 12.8% clip to 4.38 million units for the month. At this current sales pace, it is estimated that previously available occupied homes are just at a 4.4 months supply, down from the 4.4-month level in November.

This declining pattern was observed for most of 2012 and is likely to continue into 2013. Slow but steady gains in employment, coupled with higher consumer confidence and record-low mortgages, have fueled sustained demand for existing homes and new builds.

A silver lining is likewise provided to Masco and Home Depot in the scenario of institutional investors, such as hedge funds, edging out individual home buyers in home re-sales, particularly on the relatively lower-priced distressed properties foreclosures. These investors have the war chest to pay in cash and can thereby outbid individual home buyers in the home re-sale market. Home improvement manufacturers and suppliers, like Masco and Home Depot, in turn benefit as these investors spend more to renovate their acquisitions as rental properties.

Opportunities from Reconstruction

Potential short-to medium-term gains for Masco as well as Home Depot can likewise be expected from spending on home reconstruction efforts in the northern states devastated by superstorm Sandy last year. In New Jersey, for instance, it is expected that the U.S. Senate will soon pass a bill authorizing $51 billion in Hurricane Sandy federal disaster aid. Notably, home reconstruction and home replacement are covered in the government financial assistance to the hurricane victims. This assistance, which also covers temporary housing, is being facilitated via the Federal Emergency Management Agency.

The state’s largest builder, Hovnanian Enterprises (NYSE: HOV), is among the companies well-positioned to explore the construction opportunities that will be opened by this federal allocation. Hurricane Sandy had minimal adverse effects on Hovanian’s operations itself, despite completion of some deals being pushed back by the superstorm. The company reported that its revenue rose 43% to $487 million for the quarter ended Oct. 31, 2012. Its net contracts rose 23% to 1,443 homes from the year-earlier period, while contract backlog, a future sales indicator, was up 29% to 2,145. Its net loss for the quarter narrowed to $84.4 million, or $0.59, from the $98.3 million, or $0.90, posted a year ago. Repurchase of debt amounting to $87 million was factored in this quarter’s results.

Added Boost from New Masco Products

Given the robust fundamentals of the U.S. housing industry, taking a strong position in Masco appears warranted as the company is well positioned to further improve its bottom line. The company reported adjusted earnings per share of $0.04 for the 2012 fourth quarter, a reversal of the $0.09 loss in the year-ago period and well ahead of some analysts’ forecast of a $0.01 loss. Its $1.9 billion net sales during the quarter, which rose 9% from $1.7 billion year-over-year, were also above market expectations of $1.81 billion. Higher sales and operating margins, particularly in its North American operations, propelled this turnaround.

Further gains can likewise be stimulated by Masco’s continuing innovation and introduction of several new products which the company hopes will bring in over 30% contribution to total revenues this year. These recent launches include those in the product segments for plumbing and foundations, the full impact of which were expected to register in Masco’s bottom line for fiscal 2013.

RhodoraDagatan has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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