9 Homebuilder Suppliers Riding the Rebound
The dry wall, cabinet, tools and plumbing fixtures manufacturers that builders rely on have posted mixed results so far this year, but they remain relatively cheap in comparison to the homebuilders themselves, and their long-term prospects are particularly attractive.
That optimism is based on the relative affordability and pent-up demand for new homes after the market's bust, homeowners' long-postponed spending on home improvements, as well as a concurrent recovery in commercial building, which will give the product suppliers pricing leverage based on the widespread need for their products.
But the housing recovery is likely to be choppy, as economic growth was sluggish in the first half of 2012 and the unemployment rate has stayed above 8%. Still, record low interest rates, forecasted at an average 3.7% on a 30-year mortgage this year and 3.5% in 2013, should provide a long-term incentive for new homebuyers, and hence building products.
Barclay's Capital said in a research note Monday that "a surprising shortage of quality housing supply is likely to drive a dramatic, multi-year recovery in home prices. This scarcity of quality homes to buy could drive prices up 5% to 7.5% per year through 2015."
But it cautions that the rally in homebuilders' stocks "has driven valuations in the sector to uncomfortable levels. It appears that we have reached that point in the rally when investors are pricing in a 'best case' scenario."
But in a positive for suppliers, it adds that "building products demand will also benefit as rising home values give homeowners the confidence to undertake discretionary projects in 2013 and beyond."
Here are summaries of nine leading housing industry suppliers, arranged in inverse order of their share price appreciation this year:
9. Fastenal (FAST)
Company profile: Fastenal, with a market value of $13 billion, provides building industry and industrial customers with all types of fasteners such as nails and screws as well as general-purpose maintenance, repair, and operations items. It has more than 2,600 store and distribution locations.
Dividend Yield: 1.74%
Investor takeaway: Its shares are up 1% this year, including 12% in the past three months, and have a 10-year, average annual return of 20%. Analysts give its shares two "buy" ratings, nine "holds," and two "weak holds," according to a survey of analysts by S&P.
S&P has it rated "strong buy," with a $60 price target on its shares, which is a 39% premium to its current price and forecast that sales will increase 17% (after gaining 22% last year) and another 16% in 2013, tied to a general economic recovery. Its second-quarter earnings climbed 19% to 38 cents per share.