If the past five years have taught us anything, it is the importance of the housing market to the global economy. A strengthening housing market has also been widely regarded as a major indicator of a growing economy. However, last week’s new-housing starts report was a bit of a shock to the markets.
New housing starts fell in April to an 853,000 annual rate, below analysts expectations of 945,000. This represents a 16.5% drop. There was some positive news in the report, as new building permits issued rose 14.3% from a month earlier, signaling that builders are preparing for more construction projects.
The three stocks below rely heavily on the housing market to drive business. The future of the housing market will dictate business growth and may already be represented in the stocks’ valuation.
The market leaders are richly valued
The Home Depot, Inc. (NYSE:HD) is the leading home-improvement retailer in the US and is credited with creating the business model. The chain was founded in 1978 and now operates 2,257 stores across North America.
Results from the company’s most recent fiscal year show that 70.6% of revenue comes from the product groups: plumbing, electrical and kitchen, building materials, lumber, and mill-work, and painting and flooring. The housing market is clearly a driver of these product groups.
Lowe’s Companies, Inc. (NYSE:LOW) is the biggest competitor of The Home Depot, Inc. (NYSE:HD) and operates in the same home-improvement retail space. The company was founded in 1946 and currently operates 1,754 stores across North America. Much like Home Depot, approximately 68% of revenue comes from segments closely tied to housing.
Both companies released quarterly earnings within a day of this writing, and the results were mixed. The Home Depot, Inc. (NYSE:HD) reported strong results, with revenue increasing by 4.3% and net earnings increasing by $200 million for the quarter.
Lowe’s Companies, Inc. (NYSE:LOW) report was not as strong, as same-store sales dropped 0.7% and revenue was flat, below analyst expectations. EPS came in at $0.49, above the prior year EPS of $0.44, but below analyst expectations of $0.51. This was the second quarter in the past four such periods where Lowe’s saw a decline in sales or profits.
While Lowe’s Companies, Inc. (NYSE:LOW) blamed “cooler than normal temperatures and greater precipitation” for the poor results, The Home Depot, Inc. (NYSE:HD)’s comments were more telling: “We continue to see benefits from a recovering housing market that drove a stronger-than-expected start to the year for our business,” according to a press release.
The Home Depot, Inc. (NYSE:HD) currently trades at a P/E of 25.9 versus a five-year average P/E of 18.3, while Lowe’s trades at a P/E of 25.7 versus a five-year average of 17.5. It would appear that both companies are pricing in strong future growth.
The specialty player flying high
Lumber Liquidators Holdings Inc (NYSE:LL) operates as a specialty retailer of hardwood flooring and hardwood flooring enhancements and accessories. The chain was started in 1994 and has 290 retail locations across North America. The company is clearly reliant on the housing market to drive its business. However, it is important to note that less than 10% of the company’s revenue comes from new home construction. Lumber Liquidators Holdings Inc (NYSE:LL) primarily serves the home-improvement market.