3 Companies Benefitting From the Housing Recovery

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

In April 2006 home prices hit a high. Afterwards, prices began a long decline hitting a seasonally adjusted bottom in May 2009. With the help of government stimulus programs, home prices started on a temporary upward trajectory hitting a new seasonally adjusted top in May 2010. Then, starting in Jan. 2012 prices started back up in what pundits call a housing “recovery” (see graph below).  Shareholders in companies associated with homebuilding experienced a windfall and valuations expanded. However, certain macro-economic conditions such as lower unemployment and better consumer confidence will sustain the housing expansion further and three companies will continue to benefit.

<img src="/media/images/user_12973/article-109-iv_large.jpg" />

Source: Standard & Poors

Since Jan. 2012, shares of home improvement retailer Home Depot (NYSE: HD) increased 59% (dividends not reinvested) beating the S&P 500 by 41% as of this writing. In the table below, year to date figures show vast improvement over 2011 reflecting the recovery in the housing market. According to Home Depot’s latest form 10-Q, customer transactions and average ticket sales increased 2% and 3% on a quarterly basis, respectively, giving further evidence of fundamental momentum.

<table> <tbody> <tr> <td> <p><strong>Home Depot</strong></p> </td> <td> <p><strong>3<sup>rd</sup> Qtr. Growth</strong></p> </td> <td> <p><strong>Year to date FY 2012</strong></p> </td> </tr> <tr> <td> <p>Sales</p> </td> <td> <p>5%</p> </td> <td> <p>4%</p> </td> </tr> <tr> <td> <p>Operating income</p> </td> <td> <p>7%</p> </td> <td> <p>13%</p> </td> </tr> <tr> <td> <p>Net income</p> </td> <td> <p>1%</p> </td> <td> <p>13%</p> </td> </tr> <tr> <td> <p>Operating cash flow</p> </td> <td> <p>Not available</p> </td> <td> <p>(5%)</p> </td> </tr> <tr> <td> <p>Free cash flow</p> </td> <td> <p>Not available</p> </td> <td> <p>(8%)</p> </td> </tr> <tr> <td> <p>Dividend growth</p> </td> <td> <p>No growth</p> </td> <td> <p>10%</p> </td> </tr> </tbody> </table>

Source: Home Depot Form 3rd Qtr. Form 10-Q

The fourth quarter should bode well for Home Depot’s shareholders as the Christmas season and continued home price increases should boost sales and cash flow.

As of this writing, Home Depot trades at 24 times (P/E ratio) earnings giving it a rich valuation.

Hardwood flooring retailer Lumber Liquidators (NYSE: LL) increased its stock price an astounding 237% since the start of Jan. 2012, beating the S&P 500 by about 217% as of this writing. Quarterly and year to date figures in the table below show robust growth in revenue and cash flow. Increased cash flow demonstrates true profitability.

<table> <tbody> <tr> <td> <p><strong>Lumber Liquidators</strong></p> </td> <td> <p><strong>3<sup>rd</sup> Qtr. Growth</strong></p> </td> <td> <p><strong>Year to date FY 2012</strong></p> </td> </tr> <tr> <td> <p>Sales</p> </td> <td> <p>19%</p> </td> <td> <p>19%</p> </td> </tr> <tr> <td> <p>Operating income</p> </td> <td> <p>90%</p> </td> <td> <p>86%</p> </td> </tr> <tr> <td> <p>Net income</p> </td> <td> <p>91%</p> </td> <td> <p>87%</p> </td> </tr> <tr> <td> <p>Operating cash flow</p> </td> <td> <p>Not available</p> </td> <td> <p>6%</p> </td> </tr> <tr> <td> <p>Free cash flow</p> </td> <td> <p>Not available</p> </td> <td> <p>68%</p> </td> </tr> <tr> <td> <p>Dividend growth</p> </td> <td> <p>Not applicable</p> </td> <td> <p>Not applicable</p> </td> </tr> </tbody> </table>

Source: Lumber Liquidators 3rd Qtr. Form 10-Q

In addition to macro-economic catalysts, Lumber Liquidators made internal improvements to infrastructure and logistics such as buying directly from mills instead of distributors and from lower cost locations. The company’s free cash flow should improve further as the company finishes its investment in infrastructure.

Lumber Liquidators’ P/E ratio of 40 gives indication of the market’s awareness of its prosperity and anticipated growth.

The fourth quarter numbers for homebuilder and mortgage banking company NVR (NYSE: NVR) gives evidence of the housing recovery for at least the east coast. The stock market rewarded NVR’s shareholders with a 47% gain beating the 18% increase in the S&P 500 as of this writing since Jan. 2012. NVR’s cash stash, representing 78% of its stockholder’s equity, positions it for any necessary investment to take advantage of the housing rebound.

<table> <tbody> <tr> <td> <p><strong>NVR</strong></p> </td> <td> <p>4th Qtr. Growth</p> </td> <td> <p>FY 2012</p> </td> </tr> <tr> <td> <p>Homebuilding sales</p> </td> <td> <p>27%</p> </td> <td> <p>20%</p> </td> </tr> <tr> <td> <p>Homebuilding operating income</p> </td> <td> <p>108%</p> </td> <td> <p>34%</p> </td> </tr> <tr> <td> <p>Homebuilding net income</p> </td> <td> <p>96%</p> </td> <td> <p>31%</p> </td> </tr> <tr> <td> <p>Operating cash flow</p> </td> <td> <p>Not available</p> </td> <td> <p>Not available</p> </td> </tr> <tr> <td> <p>Free cash flow</p> </td> <td> <p>Not available</p> </td> <td> <p>Not available</p> </td> </tr> <tr> <td> <p>Dividend growth</p> </td> <td> <p>Not applicable</p> </td> <td> <p>Not Applicable</p> </td> </tr> </tbody> </table>

Source: NVR’s latest earnings announcement

New orders for houses increased 22% in the most recent quarter with the average new order prices for houses increasing 9%. In 2012, the largest increase came from the Mid-Atlantic region (Virginia, West Virginia, Maryland, Delaware, and Washington D.C.) increasing 27%.

As you may have guessed, NVR’s P/E ratio stands in the high range at 29.

Looking forward, if the housing recovery continues its upward momentum the stock market will continue to tolerate the high valuations mentioned above and it may even decide to expand those valuations. In summary, the housing recovery will cause the fundamentals of Home Depot, NVR, and Lumber Liquidators to improve vastly providing more fuel for their rally.

stockdissector has no position in any stocks mentioned. The Motley Fool recommends Home Depot 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!

blog comments powered by Disqus