A stronger-than-expected housing recovery in the US has sent bullish signals to the market. The recovery has seen not only rising home sales but also a sharp recovery in house prices. Bears believe that 2012 was the year of the housing recovery and that it has already been factored in the building stocks. However, Credit Suisse estimates home improvement spending to increase 7% in 2013 and 8% in 2014. This means that we might see another rally in the building stocks.
Caesarstone Sdot-Yam Ltd (NASDAQ:CSTE) – Increased penetration in the U.S., new product introductions, increased capacity and a recovering U.S. housing market is expected to drive sales for Caesar Stone. The U.S. is integral to future sales, and this is made more important by a new U.S. plant slated for 2015. Credit Suisse has set a target price of $22, which implies 26% upside. The $22 target price is based on a forward multiple of 6.5x and a 2014 EBITDA estimate of $109 million.
Masco Corporation (NYSE:MAS) – The recovery in U.S. housing is expected to drive higher sales across Masco’s platforms, with the greatest benefit to its installation (80-85% new construction) and cabinets segments. The paint and plumbing segment is expected to remain the highest contributor to EBITDA. However, growing participation from recovering cabinets and installation is expected. A large exposure to the European market (~20% of sales come from Europe) could remain a headline risk. Credit Suisse has set a target price of $22, which implies 27% upside to current levels. The $22 target price is based on a forward multiple of 9.5x and a 2014 EBITDA estimate of $1.04 billion, which is appropriate given Masco’s ~80% exposure to the recovering U.S. housing market and the anticipated improvement in its cabinets segment. Moreover, the stock’s dividend yield of 1.50% doesn’t receive the attention it deserves.
Stanley Black & Decker, Inc. (NYSE:SWK) – Experts continue to see opportunities for Stanley Black & Decker to capitalize on growth in emerging markets via its mid-price point hand tools, power tools, and commercial hardware, with additional growth resulting from better U.S. housing and its industrial segment. A continued margin expansion from the progression of the Niscayah acquisition and further revenue synergies from Black and Decker are expected.
However, similar to Masco, European operations remain a big headwind for the company’s revenues given its ~28% exposure to Europe. The Street expects the company to return capital to shareholders in 2013, with modest debt reduction and a $700 million share repurchase, followed by a likely increase in the dividend in 2014. Currently the stock gives a decent dividend yield of 2.50%, which is higher than the average dividend yield of 1.74% paid by an Industrial stock. Credit Suisse has set a target price of $88, which implies 16% upside from current levels. The $88 target price is based on a forward multiple of 8.5x and a 2014 EBITDA estimate of $1.9 billion. The Street believes that we could see multiple expansion as the company realizes better margins from acquisitions and an improved outlook for Europe.