Is This Stock a Good Housing Play?
Lee is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By now every investor should know that the current strength in the US economy lies in things like autos and housing. This is not to say the economy is flourishing overall, but it doesn't need to for stocks in the housing sector to do well.The truth is that companies in these sectors have recovered from such a low base that they are seeing significant opportunities for earnings expansion as the housing upturn occurs. And the market has wasted no time in pricing this in. Housing related stocks have done very well in the last year but is there still value in stocks like RPM International(NYSE: RPM)?
RPM International But Probably Wishes it Wasn’t
Or rather it probably wishes it had less European exposure. The recent results painted a mixed picture of its performance and outlook. On the one hand its consumer business benefited from increased turnover in US housing and contributions from acquisitions. For the nine months of 2013, consumer sales rose 13.4% with EBIT up 32% to $132.1m. While on the other hand its industrial sales rose 6.4% but segment EBIT fell 53.8% thanks to a combination of issues discussed below.
While industrial sales growth was helped by acquisitions, profitability was significantly affected by weak European conditions and US roofing which is affected by weak Government spending and tougher comparables from last year’s hurricane affected roofing activity.
Indeed if we go back to what Beacon Roofing Supply (NASDAQ: BECN) said recently then this trend is confirmed. Beacon reported that commercial roofing pricing was flat but residential pricing has been up sequentially for a few quarters now. After the industry laps Katrina affected comparables then I suspect residential is likely to grow again and commercial construction will lag afterwards. As for RPM the question of roofing relates to its exposure to government work. Unfortunately it’s not only due to the necessity public spending restraint because RPM is also embroiled in an investigation over some of its previous work on federal government contracts. A settlement over the issue is expected before the end of May.
Elsewhere its core commercial construction business is doing quite well
Housing Industry Making a Comeback
The consumer side looks set to grow nicely for RPM this year, indeed it upgraded its expectation for full year growth (to May 2013) to above the previously guided 8-10%. By way of comparison, industrial growth is now forecast to struggle to hit its 6-10% target.
Housing is making a comeback in the US and we can see the evidence of this in the paints sector with something like Sherwin-Williams (NYSE: SHW) which entered 2012 with EPS of $5.52 being forecast for the full year but ended it with $6.49. The company is probably the pick of the sector thanks to its US housing exposure but investors should also look at something like PPG Industries (NYSE: PPG) which has recently acquired the US household paints division of Akzo Nobel. PPG is more of an industrial play than Sherwin-Williams (aerospace and automotive have been good to it this year) and it is more exposed to conditions in China as a consequence. Both stocks have had great runs over the last year but going forward I think Sherwin-Williams evaluation and PPG’s industrial exposure to China are the key things to consider.
Another stock to consider in this context is Valspar (NYSE: VAL). This company is seeing some improvements in its home improvement channel in North America but it also has exposure to housing in China and construction in China. Frankly I think the latter is worrying in the medium term. The Chinese government certainly has the firepower to buy its way to 7-8% GDP growth this year but if domestic demand isn’t stimulated enough by these measures then the Chinese property market may well find itself facing tougher times in the next few years. Moreover dampening down real estate speculation is actually an aim of the government.
Where Next For RPM International?
Income seekers will love its dividend and it has a long term history of hiking them. However it is hard to argue that the stock is cheap now and it may well face some severance costs in Europe as it adjusts to a lower volume of business there. Moreover the settlement issue overhangs the stock to a certain extent.
On a more positive note US housing looks set to continue do well and I think construction markets will follow. Its US housing based acquisitions are working well and the Brazilian company it acquired offers the prospect of some international growth while Europe treads water.
Analysts are calling for mid teens earnings growth to May 2014 which puts it on a forward earnings of 14.6x. It’s probably close to fair value. I think there are better ways to play the US housing recovery but if you are bullish on the global economy then it could fit the bill.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. 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!